Luxembourg Warrant Plan Regime Amended

On 29 November 2017, the Luxembourg tax authorities released the highly anticipated circular on stock option/warrant plans (the "Circular"). The publication of the Circular follows the announcement made by Finance Minister Gramegna during his presentation of the 2018 budget, according to which the regime of stock option/warrant plans would be amended soon. The Circular replaces the former circulars 104/2 Income Tax Law of 20 December 2012 and 104/2bis Income Tax law of 28 December 2015 as well as internal administrative guidelines from the tax authorities.

Which changes have been introduced, to which option/warrant plans will they apply and when do these changes become effective?

Scope of the Circular

The Circular deals with the valuation rules applicable for tax purposes when determining the value of benefits in kind granted by employers to employees (senior executives) in the form of options or warrant plans.

The specific lump sum valuation method which is presented in the Circular only applies to freely transferable options. In practice, in most cases, these will take the form of warrants, which are granted on stock exchange indexes and/or stocks of third party corporations.

What are described as stock options in practice are generally options granted to employees on the stock of their employers' company. Since these types of option are, in many cases, not freely transferable, most of the time, they will not fall within the scope of the lump-sum valuation rules described in the Circular.

In the comments below, we refer to "warrants" as these are in practice the most commonly used instruments, being warrants based on stock market indices, when applying the provisions of the Circular.

Valuation of warrants - Increase from 17.5 to 30% as from 2018

The Circular amends the rules applicable to the computation of the value of warrants (or any other freely transferable options). In the absence of a more precise valuation and subject to certain conditions, a lump sum valuation is allowed as follows:

as from 1 January 2018, the value of the warrants will be deemed to be equal to 30% of the value of the underlying assets; the valuation at 17.5% (as applicable since 2013) will remain applicable until 31 December 2017. The Circular specifies that the valuation at 17.5 or 30% cannot be applied when warrants are granted in lieu of a legal or contractual severance payment following the termination of an employment contract.

The conditions for being able...