The share is already worth more by the time the employee exercises their option. However, they do not necessarily have the option of selling it to pay the tax. The Luxembourg proposal aims to remove this obstacle for schemes that meet its criteria.
The text provides an example. An employee exercises 500 options at €10 per share and pays €5,000. Each share is then worth €20, but no tax would be due at this stage under the special scheme. He then sells his shares at €30 each, receiving €15,000. His taxable income would be €10,000, i.e. the sale price minus what he paid for the shares. He would be taxed at a quarter of his personal overall tax rate. This is not a flat rate of 25%.
Luxembourg does not feature in the comparative table published by the European Central Bank (ECB) in its study on the future EU Inc. scheme. The ECB uses the ‘Not Optional’ ranking, which assesses, amongst other things, the timing of taxation, the tax burden on employees and the scope of eligible schemes. As the Luxembourg proposal has not yet been adopted, it cannot be given a rating in this ranking. The national schemes listed do, however, provide points of comparison.
Fewer restrictions for businesses
Estonia, Latvia and Lithuania each score 30 out of 30. In all three countries, employees may defer tax until the shares are sold, provided they meet the conditions of the favourable scheme. Latvia requires that options be held for at least 12 months before they are exercised; Estonia and Lithuania require three years. If exercised earlier, they lose this favourable treatment. The Luxembourg proposal does not set a comparable minimum period between the grant and the exercise of the options.
The tax rules differ from those applicable to a sale. Not Optional states in its comparison that in Latvia there is a 20% rate on the difference between the sale price and the value of the shares at the time of exercise, as well as a 20% rate on the capital gain realised in Estonia. A reform due to come into force in 2026 provides for a 15% rate in Lithuania on the sale of shares acquired through options, subject to certain conditions, including a three-year holding period prior to disposal. These percentages alone are not sufficient to identify the most cost-effective regime: the conditions and the gains subject to tax differ.
The most striking difference lies in the scope of eligible companies. According to Not Optional, none of the three Baltic states imposes a cap on the size of the employer or the number of options it may grant. In Luxembourg, the company must be less than ten years old, employ fewer than 150 staff and have a balance sheet total or turnover not exceeding €30m. It must also have at least two full-time equivalent staff and have spent at least 15% of its operating expenditure on research and development during one of the three financial years preceding the grant of the options. This threshold must be certified. For a company belonging to a group, the criteria relating to age, workforce and size would be assessed at group level.
Luxembourg is better placed than its neighbours
The thresholds are also higher in some neighbouring countries. The French BSPCE scheme described by Not Optional applies in particular to companies less than 15 years old with fewer than 250 employees and a turnover of no more than €50m. The favourable German scheme may apply to companies with fewer than 1,000 employees, subject to higher financial thresholds. France scores 26 out of 30 and Germany 25. Their schemes and other conditions differ from the Luxembourg proposal; these thresholds show precisely where the latter restricts access to its benefits at an earlier stage.
Belgium and the Netherlands, both scoring 14 out of 30, illustrate, by contrast, the merits of the timetable chosen by Luxembourg. Under the Belgian scheme described by Not Optional, options accepted within the required timeframe are, in principle, taxed as soon as they are granted. In the Netherlands, employees may defer tax until the shares become tradable, subject to a limit of five years after the options are exercised. For eligible schemes, the Luxembourg proposal would wait until the shares are actually sold.
The tax bill of 1 July does not provide the instruments that a Luxembourg company needs to raise funds. A sàrl can already issue several categories of shares, including profit-sharing shares, no-par value securities and privately placed convertible bonds. The issue of such bonds requires the consent of the shareholders. Shares in a sàrl are not freely transferable, and their transfer to a new shareholder may require approval.
The EU Inc. proposal aims to establish common rules amongst Member States for various financing instruments and corporate procedures. The ECB sees this as a means of reducing the need for legal adjustments during cross-border fundraising; it points out that tax rates on options would remain a matter for individual Member States. The Luxembourg proposal would address this latter aspect, with a deferral until sale and a preferential rate applicable only to schemes that meet its eligibility criteria.
