A new circular on the tax treatment applicable to stock options (the Circular) was published by the Luxembourg direct tax authorities on 29 November 2017. It follows the announcement made by the Luxembourg finance minister earlier this year during the presentation of the 2018 budget in front of the Luxembourg parliament where he announced that certain stock option plans would be taxed at half of the global rate applicable to a taxpayer’s ordinary income. The Circular also clarifies other aspects such as what needs to be communicated to the tax authorities and how, and now consolidates into one single Circular, rules which were previously explained throughout several sources (thus replacing circulars L.I.R. n° 104/2 of 20 December 2012 and 104/2bis of 28 December 2015 as well as tax authorities internal guidance L.I.R./N.S. 104/3 of 22 May 2013 and 104/4 of 12 January 2015).
To reach the above mentioned level of taxation, the Circular raised the estimated realisation value of non-listed freely negotiable options (also known as warrants) to 30% of the underlying security (share). It remains possible to determine this value via the methodology of the American economists Myron Scholes and Fisher Black (or another comparable financial method). This 17.5% to 30% increase will apply as from 1 January 2018.
The Circular specifies that, for warrants (i.e. option plans where the underlying securities are not linked to those of the enterprise granting them), the valuation must nevertheless remain in line with reasonable conditions which are defined based on three criteria:
- the options cannot exceed 50% of the total annual remuneration (options included). This limit is appreciated on an individual basis (i.e. per beneficiary of the plan);
- the option plan warrants can only be attributed to executives, as defined under Luxembourg labour legislation, i.e. employees whose salary significantly exceeds that of employees as determined by the collective salary agreement (or according to another salary scale) provided this salary is paid for appropriate time spent exercising real managerial functions, whose autonomy in their work organisation is large and whose working hours are not subject to constraints.
- the option plan must be designed in such a way that the option price does not exceed 60% of the value of the underlying security.
Where one of those three conditions is not met, the options granted are taxable on the full grant price.
For option plans granted in 2016 and 2017, where nothing has been communicated to the tax authorities yet, the employer must communicate to the inspector from the relevant office of the bureau d’imposition de la retenue sur les traitements et salaires (RTS) as follows:
- prior to 1 February 2018 for advantages addressed by the Circular and granted during 2016;
- prior to 1 April 2018 for addressed by the Circular and granted during 2017.
In the absence of communication in line with the above, the employer will be excluded from the regime as described in the Circular for future years.
For option plans expected to be granted as from 2018, the employer must inform the inspector from the relevant office of the RTS at the time the advantage is granted (i.e. made available to the employee) and not by plan set up (advantages granted on the same date may be grouped in a single communication as long as they are part of the same plan). The communication must be detailed (and include information on the gross salary earned by the beneficiary of the advantage) and made via the appropriate electronic format through an online secured channel (the relevant information can be found under http://www.impotsdirects.public.lu/fr/echanges_electroniques/stock_options.html). Where the communication is not done accordingly, the options granted will be taxable on the full grant price.