A new draft law is under discussion among Luxembourg lawmakers and it could help companies attract talent. The Bill proposes taxing employees’ stock options when the shares are actually sold rather than before the employee has realised any liquidity, as is the case currently.
By Stéphane Allart (Partner, Ancorius), Christian Bamberg (Manager Personal Tax, Ancorius) and Alain Noullet (Accountant, Initium)
The proposed reform will above all change the timing of taxation. It is however important to note that the new regime is optional.
Under the current Luxembourg regime, the difference between the market value of company shares and the exercise price (purchase price) is treated as salaried income and may be taxable even before the employee has received any cash.
In practice, this means an employee may be taxed on this difference even though the shares have not yet been sold and their future value remains uncertain. If the shares subsequently decrease significantly in value, or become worthless, the employee may already have paid tax on a gain that will ultimately not be realised.
The new proposal aligns taxation with the moment when value is actually realised. It is important to note, however, that it does not merely defer taxation, it also changes the taxable basis. While this may result in a broader taxable amount if the company’s value increases substantially, it removes the risk of taxing employees before they have actually realised any economic gain.
Under the current scheme, the taxation may fall in the scope of the employment income as benefit in kind at the time of the vesting. The new regime does not only differ the taxation at the time of the disposal of the shares, it also implies a change in the nature of the income realised as this latter is now a disposal of securities (instead of a benefit in kind and potentially later on a disposal of securities) as it also changes the category of income for the employee.
Double Tax Treaties may therefore also influence the taxation as the right to the tax income from the disposal of securities belongs to the country of residence of the employee. Accordingly, the tax features of the new regime should only apply to employees residing in Luxembourg. For commuters, their own state law should be applicable.
How would it benefit employers?
For many start-ups and growth companies, attracting and retaining highly qualified employees is one of their greatest challenges.
A more attractive stock option regime enables employers to offer employees a genuine participation in the company’s future success without creating an immediate tax burden. It therefore renders the offer attractive and improves motivation and long-term retention while preserving cash resources for the employee.
Several eligibility conditions
As currently drafted, the proposed regime is subject to a number of eligibility conditions designed to ensure that it benefits young innovative businesses.
The employer must qualify as a young innovative company, i.e. a company that has been established for less than 10 years, employs fewer than 150 full-time employees, and has an annual turnover or balance sheet total not exceeding €30 million.
In addition, the company should have a strong commitment to innovation, meaning in principle that it dedicates at least 15% of its operating expenditure to R&D activities.
The aim is to support companies that often compete against much larger organisations in attracting talent.
The regime is optional and applies only to qualifying employee stock option plans that meet the statutory requirements. Employers opting into the regime will also be subject to specific reporting and compliance obligations vis-à-vis the Luxembourg tax authorities.
Overall, these eligibility criteria are intended to provide safeguards against misuse and tax planning schemes while ensuring that the regime is available to companies that genuinely contribute to innovation and economic growth.
Some businesses will benefit more than others
The greatest beneficiaries are likely to be early-stage and fast-growing businesses in sectors such as technologies, fintech, artificial intelligence, and digital services. These companies frequently rely on equity participation because financial resources are often firstly allocated to their growth rather than to offering high salaries.
Employee stock options align employees’ interests with those of shareholders by giving them a stake in the company’s long-term success. Stock options may be an incentive to encourage commitment, entrepreneurial thinking and help companies retain talent. For many start-ups, offering equity is also an important way to attract talent when they cannot compete with larger employers on salary alone.
More than a tax measure
Beyond its tax implications, this proposal sends a strong signal that Luxembourg wishes to strengthen its position as an innovation hub.
By making employee participation schemes more attractive and aligning taxation with actual value creation, the reform supports entrepreneurship, facilitates access to talent and contributes to a more competitive business environment.
It also creates a clear legal framework, replacing the previous reliance on administrative guidance and providing greater certainty for both employers and employees.
How does this proposal compare to what other countries offer and would this make Luxembourg more competitive on an international level?
Many innovation-focused countries already offer favourable tax rules for employee equity participation. By deferring tax until the shares are sold, Luxembourg would address a key issue with the current regime: employees benefiting from stock options and being taxed before they have realised any liquidity or finding a way to finance the acquisition of the shares before if granted against market value consideration.
That said, the proposed regime should not be viewed as a tax reduction. It represents a different policy choice.
Under the current regime, employees may be taxed when exercising their stock options. However, provided the shares are subsequently held for more than six months and the employee does not hold a substantial participation (less than 10%), any further appreciation in value may often benefit from the ordinary Luxembourg capital gains rules.
Under the proposed regime, taxation is deferred until the shares are sold, i.e. eliminating the risk of taxing unrealised gains. In return, the taxable basis is broader, as it would encompass the whole gain realised by the employee (i.e. the difference between the sale price and the exercise price), and subject to a significantly reduced effective tax rate.
Not being taxed before cash collection or not having to finance shares are particularly attractive when there is uncertainty about the company’s future value and timing of effective disposal.
Conversely, where a start-up is very successful and its value increases significantly after options have been exercised, the current regime may to some extent produce a lower overall tax burden because of the gain realised upon disposal of minority holdings held for more than six months may fall under the exemption of tax provided by the ordinary capital gains rules.
Overall, the reform is less about reducing taxation in every situation and more about creating a predictable and internationally competitive framework that better aligns taxation with the economic gains actually realised by employees.
