New equity compensation laws in Luxembourg & what they mean for you

Luxembourg has introduced new laws around equity compensation, aiming to establish a fairer and more transparent system for employee incentives. But what do these new laws mean in a nutshell, for you? Basically, the government in Luxembourg is making it easier for companies to share profits with their employees and are giving tax breaks to both the employees and employers to encourage the practice.

One of the big material changes is the introduction of the Profit Share Scheme (PPS), which came into effect on the 1st January 2021. As the name suggests, a PPS allows employees to share in company profits, with the additional benefit for both the employee and employer that this results in tax breaks and exemptions.

Profit Share Scheme (PSS)

There are – as is usually the case with financial law – restrictions and criteria that must be met for any PSS.

Probably the most important for the employer is that they can’t offer more than 5% of their yearly profits as a reward for their employees. So, if a company made €10 million in profit in any given year, they could only put a maximum of €500,000 towards their PSS.

The biggest thing for an employee to remember is that any award can’t exceed 25% of their gross salary (excluding additional bonuses and benefits in kind). So, if a person made €100,000 per year, they could only be offered a maximum of €25,000 in rewards in any given year under a PSS.

And only a proportion of that reward is subject to tax – up to 50% of it can be entirely tax-exempt. On the employer side, any amount paid through a PPS is also considered tax-deductible.

While the employers do have complete discretion over who can participate in a Profit Share Scheme, every employee can potentially be in a scheme.

There is also another major restriction; you have to be a native of Luxembourg. For non-Luxembourg nationals working in the country, they need to follow another set of rules that have been recently updated.

Foreign employees in Luxembourg

Beyond the introduction of the PSS, the tax regime for impatriates – those foreign employees who have moved to Luxembourg – was updated. Foreign workers make up 50% of Luxembourg’s workforce, and attracting top talent to the country has always been a strategic aim of the government and private sector.

As well as changes to make it easier for smaller companies to sponsor foreign workers, Luxembourg introduced new regulations for foreign workers that will reduce what they pay in tax on their rewards.

Now, employers can pay foreign workers a cash premium (which cannot exceed 30% of that individual’s annual remuneration) which is subject to a tax exemption of up to 50%. They’ve also extended this tax exemption; previously a foreign worker could only benefit for a maximum of five years, but now the limit is eight.

This all points towards a policy of continuing to attract high-value foreign workers to Luxembourg, and then reward them for staying.

2017 Circular

Luxembourg has also introduced changes to the taxation of ‘stock options’ and ‘warrants’, abolishing a 2017 Circular resulting in the following updates:

You can no longer apply a lump-sum valuation method to calculate the taxable benefit deriving from the vest of any stock options or warrants.
You can no longer apply any discount to awards that are subject to a blocking/holding period
An employee can no longer sell their shares within seven days after vesting/exercising without any tax implications as they previously could.
A person is no longer required to notify the tax authorities at the tax point.

The upshot

Combining all these changes make for an exciting new period in employee ownership in Luxembourg. While the abolition of the 2017 Circular will not stop companies from implementing incentive schemes in any way, it will subtly change the methods those incentives are given.

For those companies with equity-based long-term incentive plans in place, these new changes will require carefully reviewing to see if you are maximising your tax advantages, as well as providing the most effective schemes to your employees to boost their productivity. For those companies looking to implement a new incentive plan in Luxembourg, the PSS is a strong avenue to pursue.

If you’d like to talk to us further about this or anything else in relation to your equity plans, get in touch for a free consultation. We are experts in equity compensation. It’s what we do. 

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