New Circular Letter on stock option plans

As announced by the Luxembourg Finance Minister in his presentation of the 2018 budget bill, the tax regime of stock option plans has been amended. On 29 November 2017, the head of the Luxembourg tax authorities (Administration des contributions directes) issued Circular Letter L.I.R. - No. 104/2 (“New Circular”) replacing, as from 1 January 2018, the former circular letter on the tax treatment of stock option plans.

The Luxembourg tax regime of stock options granted by an employer to its employees distinguishes between (i) individual or virtual options and (ii) freely negotiable options:

- Individual or virtual options are not freely negotiable and cannot be sold by the employee. Hence any benefit in kind is only recognised for tax purposes at the time the option is exercised. The value of the taxable benefit in kind corresponds to the difference between the fair value of the underlying shares at the time of exercise of the option and the exercise price. If the shares acquired pursuant to the exercise of the options may not be transferred by the employee during a certain freezing period, a discount equal to 5% per year of freezing, without exceeding 20% of the fair market value, may be deducted from the value of the shares in order to determine the taxable benefit in kind. The benefit in kind thus determined is then taxable as a salary. In respect of individual or virtual options, the New Circular does not change the former regime.

- Freely negotiable options are those which may be sold immediately by the employee. Like the former regime, the New Circular foresees that the benefit in kind constituted by freely negotiable options is taxable upon the granting of the options. The benefit in kind corresponds to the difference of the fair market value of the options and the purchase price paid by the employee for the acquisition of the options. If the option is not listed, the fair market value can be determined by using the Black-Scholes method or any other similar financial method. In case the valuation is not determined by the use of one of these financial methods, the Luxembourg tax authorities assume that the value of the option is established at 17.5% of the value of the underlying stock at the time the option is granted. Such valuation must however correspond to “reasonable conditions”. The New Circular increases the 17.5% to 30% and defines the meaning of “reasonable conditions”. The conditions are “reasonable” if the following 3 conditions are cumulatively fulfilled:

  • The portion of the options must not exceed 50% of the annual gross remuneration (options included) of the employee. In case of a stock option plan, this criterion is considered on an individual basis for each participant; 
  • The stock option plan may only apply to senior executives (cadres supérieurs) as defined by Luxembourg labour laws; and
  • The stock option plan must be structured so that the purchase price of the option does not exceed 60% of the value of the underlying stock.

In case one of these 3 conditions is not fulfilled, the granted options are taxable on the basis of the aggregate attribution price.

The New Circular increases the effective tax rate of freely negotiable options from 13.27% to 22.75% maximum. However, such increase still remains attractive and taxes the benefit in kind at the same level as an extraordinary income subject to the half-global rate method.

The Circular also provides for the possibility of syndicated stock option plans where employees of different enterprises may participate.

Finally, the new Circular amends the reporting requirements as follows: 

2015 and previous years                              Detailed communication of the withholding tax upon request by the tax authorities

2016 and 2017                                                 To the extent no reporting has been made, the reporting needs to be made to the tax authorities, either upon                                                                            request of the tax authorities within a tax audit or otherwise upon the initiative of the employer:

  • Benefits granted during 2016 must be reported by 31 January 2018 at the latest; and
  • Benefits granted during 2017 must be reported by 31 March 2018 at the latest. Failure to report within these delays results in an exclusion of the stock option regime for the future.

2018 and following years                              Reporting of the benefit must be made by the employer at the time that advantage is put at the disposal of                                                                                 the employee. Failure to report within this delay results in taxation of the entire attribution price.