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...