On 1 July 2026, the Luxembourg Government submitted a draft law amending the Luxembourg Income Tax Law to the Chamber of Deputies. The Draft Law pursues two distinct objectives: codifying the general rules on employee stock option taxation and introducing a dedicated preferential regime for options granted by qualifying young innovative companies. Both sets of rules would apply to options granted from the 2027 tax year.
The specific regime for young innovative companies
The centrepiece of the Draft Law is a new tax regime designed to help early-stage businesses attract and retain talent. Where an employer elects to apply the regime, employees face no tax at grant and no tax at exercise. Instead, the taxable event is deferred to the moment the employee disposes of the shares acquired through exercise. The gain, calculated as the difference between the disposal price and the exercise price, is then taxed at one-quarter of the employee's global income tax rate. Based on 2026 rates, this produces a maximum effective rate of approximately 11.45%, including the contribution to the employment fund.
The exercise price may be freely set by the plan, including at €0, provided it is clearly stated in the plan documentation.
Employer entity eligibility
To qualify, an employer entity must satisfy four sets of conditions.
Luxembourg nexus. The entity must be either a fully taxable Luxembourg resident capital company or cooperative, or a fully taxable capital company or cooperative resident in another EEA state with a Luxembourg permanent establishment.
Size and age. The entity must have been established for fewer than 10 years, employ fewer than 150 employees, and have a balance sheet total or revenues not exceeding €30m. Where the entity belongs to a group, these thresholds are assessed at group level, and the employee and revenue conditions must be certified by an approved statutory auditor or chartered accountant.
Innovative activity. The entity must have at least two full-time employees at the relevant testing date and R&D expenditure representing at least 15% of total operating expenses in at least one of the three preceding financial years. The 15% threshold must likewise be certified by a statutory auditor or chartered accountant. R&D is defined as systematic creative work aimed at expanding knowledge and developing new applications. Eligible costs include personnel costs for R&D employees and equipment costs, apportioned on the basis of time allocated to R&D.
Exclusions. Law firms, audit and accounting firms, real estate entities, venture capital companies (SICARs), entities with securities traded on a regulated market, and entities created through a merger or division are all excluded.
For group purposes, the Draft Law adopts the definition of partner enterprises and linked enterprises in Annex I, Article 3 of Commission Regulation (EU) No 651/2014 (the General Block Exemption Regulation).
Employee and plan conditions
Only non-freely negotiable options, meaning options that are neither listed nor freely transferable, qualify. Virtual options that create a contractual right to a cash payment linked to company value or performance, without conferring shareholder status, are expressly excluded.
The employee must receive employment income from the qualifying employer and must not hold, at grant or during the preceding 24 months, more than 25% of the capital, voting rights, or profit rights in any group entity. This threshold is intended to exclude founders and other persons with a significant pre-existing economic interest.
An anti-abuse condition also applies: the options must not be granted in substitution for existing annual remuneration. The Draft Law's commentaries indicate this condition is generally satisfied where the employee continues to receive at least the same annual remuneration as in the year before the grant.
Opt-in mechanism and reporting obligations
The specific regime is not automatic. Each employer must elect to apply it, and may do so separately for each plan. An employer that opts in must electronically transmit to the competent payroll tax office, before 1 March of the year following the year of grant, a nominative list of employees, grant dates, number of options, exercise prices, and, where applicable, the group chart. Supporting documentation must be retained and made available for verification. Failure to comply with these obligations results in the regime not applying, so the ordinary rules would govern instead.
Codification of the ordinary regime
The Draft Law also restates and clarifies the existing rules for plans that fall outside the specific regime, whether because the employer does not qualify or simply does not elect to apply it.
For freely negotiable options, the taxable employment benefit arises at grant. The benefit equals the difference between the fair market value of the options at grant (determined using a recognised valuation method) and any amount paid by the employee to acquire them.
For non-freely negotiable options, taxation occurs at exercise. The benefit equals the difference between the fair market value of the shares acquired and the exercise price. Where the shares are subject to a lock-up period, the Draft Law introduces a flat discount of 5% per year of lock-up, capped at 20% of the stock exchange or estimated realisable value of the shares. The discount is available only if the employer complies with the applicable reporting obligations.
Virtual options are equally excluded from the ordinary regime's definition of options, and cash payments under virtual arrangements remain taxable under the general employment income rules.
Reporting deadlines for the ordinary regime mirror those under the specific regime: 1 March of the year following the year of grant for freely negotiable options, and 1 March of the year following the year of exercise for non-freely negotiable options.
Legislative process and next steps
The Draft Law must now pass through the full Luxembourg legislative process: scrutiny by a parliamentary commission, opinions from advisory bodies including the Council of State, parliamentary debate and vote, and publication in the Official Gazette (Mémorial). This typically takes several months.
Employers with existing or planned stock option arrangements should use that period to assess eligibility for the specific regime, review plan design and exercise price mechanics, and put in place the documentation and electronic reporting processes that both regimes require. Those who will remain in the ordinary regime should also address the codified valuation requirements and the conditions for claiming the lock-up discount.