Luxembourg introduces a new tax credit to enhance Luxembourg attractiveness for start-ups

On 17 December 2025, Luxembourg Parliament voted to approve Bill n° 8526 introducing a new tax credit, effective from the 2026 tax year, to encourage investments of Luxembourg resident (or assimilated) individuals in start-ups.

The Law aims to mobilise external capital to strengthen the equity base of start-up companies, diversify their shareholder structure, and reduce reliance on bank financing. The measure is part of a broader strategy designed to enhance Luxembourg’s attractiveness as a hub for innovation and entrepreneurship, aligning with European standards for state aid and supporting the growth of the local start-up ecosystem.

Eligible start-up entities

The tax credit relates to investments in “start-up entities”. These are defined as collective entities (capital companies or cooperatives) that:

• Have been established for less than five years at the end of the relevant tax year for which the tax credit is claimed.
• Employ fewer than fifty employees.
• Have a balance sheet total or annual turnover not exceeding EUR 10 million.
• Are either a fully taxable resident of Luxembourg or of the European Economic Area (EEA). For EEA entities, it is further required that (i) they are subject to a corporate income tax comparable to Luxembourg corporate income tax and (ii) operating through a Luxembourg permanent establishment.

If the entity is part of a group, these conditions must be met at the group level, and certification by an approved auditor or chartered accountant is required.

In addition, to qualify, the start-up entity must conduct innovative activities evidenced by:

• At least two full-time equivalent individuals working for the start-up entity. This does not only refer to employees under labour law but also extends to independent directors. External services providers are however to be disregarded.
• Research and development (R&D) expenses representing at least 15% of its total operating costs in at least one of the three financial years preceding the application for the tax credit (or in its first year of operation for newly established entities). In this respect, R&D refers to work that is systematically undertaken to increase knowledge and developing new applications, whether in products, services, processes, methods, or organisational models. This 15% threshold must be certified by an approved auditor or chartered accountant.

The Law excludes certain sectors of activity that are deemed not to meet the above-described innovative requirement such as:

• Law firms, audit firms, accountants.
• Companies primarily engaged in real estate, investment companies in risk capital (SICARs), listed entities, and those formed by merger or demerger of companies as defined in the Merger Directive.
• Entities that have distributed dividends or reduced capital (except to offset losses). This exclusion is meant at preventing risks of abuse of law.
• Entities subject to unresolved EU recovery orders or classified as “enterprises in difficulty” under EU Regulation 651/2014.

Eligible investments

To be eligible investments, the following conditions should be complied with:

• The investment must be made through the acquisition of new, fully paid-up, nominative shares or units in the start-up’s capital, either at incorporation or during a capital increase.
• Investments must be held directly (or through tax transparent vehicles, proportionally) for a minimum uninterrupted period of three years.
• Are only considered the amounts invested in the share capital and share premium of the start-up entity (contributions recorded in account 115 of the standard chart of accounts are disregarded).
• The minimum eligible investment per entity is EUR 10,000 per tax year.
• The eligible investment is capped at a 30% ownership threshold per investor and a total of EUR 1.5 million per start-up entity.

Eligible investors

The tax credit is only available to individual taxpayers, either resident or assimilated non-resident (i.e., non-resident taxable in Luxembourg under article 157ter of the Luxembourg Income Tax Law for the year in which the investment is made).

Investors who are employees or founders of the start-up are not eligible for the credit.

Tax credit rate and calculation

The new start-up tax credit operates as follows:

• The tax credit is set at 20% of the eligible investment amount made by the taxpayer in the start-up entity.
• The maximum tax credit that can be obtained by a taxpayer in a single tax year is EUR 100,000. Any exceeding amount may not be carried forward to a subsequent tax year.
• However, if the tax credit exceeds the taxpayer’s income tax liability for the year, the excess is non-refundable but can be carried forward and offset, under the same conditions, against future tax liabilities.

Compliance requirements

When applying for the start-up tax credit, the investor must attach the following documents to their income tax return for the relevant tax year:

• A certificate issued by the start-up entity, no later than two months after the release of funds, certifying that: 
  • The investor’s shares or units have been fully paid up and represent the share capital.
  • The investment meets the minimum and maximum thresholds (including the EUR 10,000 minimum and the 30% ownership cap).
  • The total investments in the entity do not exceed the €1,500,000 cap.
  • The investor is not an employee or founder of the start-up and does not have a subordinate relationship with the entity.
• A certificate issued by the start-up entity after the end of the tax year, certifying that:
  • The entity meets all eligibility criteria for a “start-up” (age, size, turnover/balance sheet, innovative character, etc.).
  • The entity has incurred qualifying research and development expenses (at least 15% of operating costs, certified by an approved auditor or chartered accountant).
  • The entity is not excluded by law (e.g., not a law firm, audit firm, real estate company, etc.).

For subsequent tax years, the investor must provide information in their annual tax return to verify that the minimum three-year holding period for the shares or units is respected. If the holding period is not met (except in cases of bankruptcy, death, or permanent incapacity), a corrective tax assessment will be issued.

This new tax credit represents a welcome development for Luxembourg’s business environment. By incentivising external investment in innovative start-ups, the law strengthens the country’s position as a leading destination for entrepreneurial activity and technological advancement. It provides a robust framework for supporting start-up companies, fostering innovation, and attracting talent and capital to Luxembourg.

The introduction of a new tax regime for stock option plans granted to employees of start-up companies, has also been announced by the government but the modalities of that regime have not been released yet.