Circular n°104/2, issued by the Luxembourg tax authorities on 29 November 2017, provides for changes in the taxation of transferable stock options/warrants as well as in the reporting obligations of all stock option schemes; it also clarifies to some extent the scope of application of this specific tax regime. This circular replaces Circulars n°104/2 of 20 December 2012 and n°104/2bis of 28 December 2015, as well as service notes 104/3 of 22 May 2013 and 104/4 of 12 January 2015.
Although the new circular applies as of 29 November 2017, most of the changes will apply as from 1 January 2018.
Here is a summary of the main amendments:
Until 31 December 2017, the taxable benefit of transferable stock options/warrants (that are not listed nor valued according to a recognised financial method) is assessed at 17.5% of the value of the underlying unit of an option/warrant on the grant date, multiplied by the number of options/warrants. As from 1 January 2018, the valuation will be increased to 30%.
As with the previous tax circular, the new tax circular stipulates that the lump-sum valuation (at 17.5% until 31 December 2017 and rising to 30% as from 1 January 2018) for warrants, i.e. options not linked to the shares of the company, must be made in accordance with reasonable conditions. These reasonable conditions (as detailed by the Ministry of Finance in a response to a parliamentary question on 1 July 2013) have not changed, but have now been included in the tax circular. As a reminder, the reasonable conditions are as follows:
If one of the above conditions is not met, the new circular stipulates that the options must be taxed on their full purchase price (whereas the previous circular said that the Black & Scholes valuation method or another comparable financial valuation method should be used).
If transferable stock options are granted instead of an employment termination payment (whether it is a legal, contractual, transactional, or judicial severance payment), the benefit cannot be assessed on a lump-sum valuation basis (at 17.5% until 31 December 2017 and rising to 30% as from 1 January 2018), but must be taxed on the full purchase price of these options.
As previously stated by the Ministry of Finance in a response to a parliamentary question on 1 July 2013, the new circular specifies that pooled stock option schemes, i.e. schemes gathering employees of different companies, are allowed.
New strict deadlines apply with respect to the employer’s reporting obligations towards the wage tax office:
1. For plans implemented in 2015 and before: a detailed report should be made upon the specific request of the relevant wage tax office (usually during a payroll audit).
2. For plans implemented in 2016: a detailed report must be made by the employer before 31 January 2018.
3. For plans implemented in 2017: a detailed report must be made by the employer before 31 March 2018.
Not respecting the above deadlines will trigger the exclusion of the benefit of the stock option regime as provided by the circular for 2018 and beyond.
For plans implemented from 2018 onwards: the detailed report must be made by the employer at the time the taxable event occurs (i.e. at the exercise date of the options in cases of non-transferable options / at the grant date of the options in cases of transferable options/warrants), and not at the time the scheme is implemented. Prior notification of the plan to the tax authorities does not exist anymore.
If the employer fails to make the report at the time of the taxable event, the tax authorities will:
Benefits taxable at the same date can be put in the same report as long as they belong to the same plan.
The detailed report should be made electronically to the relevant wage tax office by using a specific form provided by the tax authorities.
As from 2018, the report should not only include the taxable benefits relating to the stock options, but also the salaries of the beneficiaries.
In this respect, for beneficiaries of transferable stock options/warrants, the report should also include the annual gross salary (as expected/calculated at the grant date of the options), excluding the options.
Employees changing employer during the year
Employees changing employer during the year, and having been granted warrants by their first employer, must inform their second employer of the amount of salary earned / the amount invested in warrants so far; the second employer will have to take this data into account to check whether a further allocation of warrants is possible or not, considering the expected annual salary for the whole year, and the 50% threshold requirement as referred to in the “reasonable conditions” (see above).
In cases of failure in the above obligations, where, as a result, the portion allocated to warrants exceeds 50% of the total gross annual remuneration, individual taxes would be reassessed based on article 136.5 LITL through the filing of an income tax return/tax décompte and under the responsibility of each concerned employee.
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