ATOZ Insights - October 2025

Draft law introducing a new startup tax credit for individuals as from 2026

OUR INSIGHTS AT A GLANCE

• Earlier this year, a legislative proposal introducing a new tax credit to encourage individuals to invest in young innovative companies was presented to Parliament.
• The draft law forms part of Luxembourg's broader strategy to foster innovation, entrepreneurship, and economic diversification.
• Strict eligibility conditions for both investors and start-up entities have led to formal objections from the Council of State, which are examined in this article.
• If adopted before year-end, the start-up tax credit would apply as from the 2026 tax year and could become a key instrument to mobilise private capital and strengthen Luxembourg's start-up ecosystem.

On 4 April 2025, the Luxembourg Government approved draft law No. 8526 ("Draft Law"). This legislative proposal aims to introduce a new fiscal incentive, a tax credit specifically designed to encourage individuals to invest in young innovative companies (the "Start-Up Tax Credit"). This new Start-Up Tax Credit, if adopted, would apply as from the 2026 tax year.

This initiative, part of a broader national strategy to boost innovation, entrepreneurship, diversification, and competitiveness of the Luxembourg economy, is intended to encourage individuals to invest in young innovative companies (the "Start-Up Entity").

To benefit from the Start-Up Tax Credit, taxpayers must be tax residents or assimilated non-resident individuals (the "Investors") who invest in and hold, for an uninterrupted period of a minimum of three years, shares directly in an entity qualifying as Start-Up Entity.

In this article, we outline the conditions that must be fulfilled by both the Investors and the Start-Up Entity in order to benefit from the Start-Up Tax Credit, as well as the rules governing the determination of the Start-Up Tax Credit amount.

Background

The Start-Up Tax Credit proposed under the Draft Law is designed to incentivise private investment in the early stages of young innovative businesses. This aims to address the structural difficulties these entities face in accessing funding, especially during the critical early years of their development. The Draft Law is consistent with both national policies, as outlined in the 2023-2028 coalition agreement "Lëtzebuerg fir d'Zukunft staërken", and European-level reflections stemming from the Draghi and Letta reports, which emphasise the importance of developing local investment ecosystems for start-ups.

Through this Draft Law, the government seeks to mobilise private savings, including those of so-called "business angels", to reinforce the innovation economy. Similar tax schemes already exist in countries like the UK (Enterprise Investment Scheme), Germany (INVEST program), and Belgium (Tax Shelter for Start-ups), demonstrating the feasibility and relevance of such a fiscal approach.

The Draft Law, though still under parliamentary discussion and pending amendments, particularly in light of formal objections raised by the Council of State, has already attracted significant attention from stakeholders.

Conditions to be fulfilled by the Investor

Eligible Investors and investment structures

According to the Draft Law, the Start-Up Tax Credit is reserved for Investors that are individual taxpayers, whether they are resident or assimilated non-resident, subject to Luxembourg personal income tax.

Investments must be made directly into the share capital of qualifying Start-Up Entity through cash contributions in exchange for new fully paid-up shares.

To avoid situations of double benefit, the Start-Up Tax Credit is not granted to a taxpayer who invests in the Start-Up Entity through a business, even if the taxpayer exploits such business on an individual basis.

Participation through fiscally transparent vehicles

Indirect investment methods are explicitly excluded from the benefit of the Start-Up Tax Credit: any participation through fiscally transparent vehicles such as SCS (Société en Commandite Simple), SCSp (Société en Commandite Spéciale), or SC (Société Coopérative) is thus not eligible. As presented in the Draft Law, this exclusion aims to preserve traceability and ensure that the benefit targets genuine atrisk capital contributions.

However, the Council of State issued a formal opposition on this point, arguing that it infringes the Luxembourg Constitution by treating similar situations unequally without objective justification. From a tax law perspective, transparent vehicles are fiscally neutral, and the income is taxed directly in the hands of the individual partners. Consequently, there is no reason to deny the benefit to investors acting through such structures when the fiscal result is identical.

Moreover, this limitation fails to account for market realities. In the venture capital ecosystem, many business angels invest through syndicates or pooling vehicles, especially to diversify risk or for administrative efficiency. Therefore, the exclusion of these structures could significantly hinder the effectiveness of the regime and contradict the underlying policy objective.

A formal opposition by the Council of State implies that the government must either introduce amendments to the Draft Law or submit the unamended version to Parliament for a vote. In the latter case, the Council of State will not waive the requirement for a second constitutional vote.

Start-up employees or founders

In addition, the Investor must not be employed by the StartUp, as defined by Luxembourg labour law, or be one of its founders within the meaning of the Law of 10 August 1915 on commercial companies during the year in which the Start-Up Tax Credit is claimed. This aims to prevent self-dealing or abuse by insiders who could manipulate the scheme for personal gain.

However, the Council of State raised a formal opposition also on this element of the Draft Law. It notes that founders and early employees are often key actors in innovative enterprises, especially in their formative years. These individuals typically take on substantial personal and financial risk, and excluding them from a regime designed to support risky investment seems paradoxical. The Council therefore suggests a more nuanced approach, possibly allowing such individuals to benefit within certain limits or under specific safeguards.

Conditions regarding the investment

In order to benefit from the Start-Up Tax Credit, the Investor must invest in a Start-Up Entity directly and acquire new shares or securities representing the share capital of that entity either at the moment of the incorporation of the StartUp Entity or upon an increase of the share capital of the Start-Up Entity.

The shares must be fully paid up in cash by the end of the tax year during which the acquisition took place and for which the Start-Up Tax Credit is claimed. If the shares are only fully paid up during the subsequent year, the taxpayer will not be entitled to the Start-Up Tax Credit for this investment.

The Draft Law determines eligibility based on the date of full capital payment, not subscription. This means that an investment subscribed in December but paid in January would be deferred to the next fiscal year. This could potentially disqualify investors, depending on the evolution of the company's status. Both the Chamber of Commerce and the Council of State find this rigidity counterproductive and recommend a more flexible rule, such as a 12-month window following subscription.

Qualifying investment thresholds

To ensure that only substantial investments benefit from the tax credit, the Draft Law sets a minimum investment threshold of EUR 10,000. This amount is assessed individually for each Investor and per Start-Up Entity. It also imposes an upper cap on the ownership stake: the Investor may not acquire more than 30% of the share capital of the Start-Up Entity. Moreover, a single Start-Up Entity may not receive more than EUR 1.5 million in total qualifying investments under the regime.

However, several concerns arise. First, the 30% cap is vague in its application, especially in case of dilution or post-subscription capital increase. The Council of State recommends clarifying the methodology used to calculate ownership thresholds, including how indirect holdings are treated, and how breaches are to be remedied or penalised. Finally, the EUR 1.5 million ceiling per Start-Up Entity, though likely intended to avoid over-concentration of aid, may limit the attractiveness of the scheme for companies seeking significant early-stage capital. The Chamber of Commerce suggests revisiting this cap, particularly for sectors with capital-intensive models.

Holding period

To ensure the investment is truly long-term and supports the business over time, the Draft Law requires that the subscribed shares be held for a minimum uninterrupted period of three years.

The Investor must undertake to hold the shares directly for an uninterrupted period of at least three years as from the end of the tax year for which the Start-Up Tax Credit is claimed. For example, a taxpayer will have to hold a qualifying investment made in 2026 until 31 December 2029.

Failure to comply with the minimum holding period of three years will result in a retroactive adjustment of the taxation (imposition rectificative) for the tax year for which the tax credit was granted (and for the subsequent tax year in case the Start-Up Tax Credit has been carried forward¹). This could happen if the Start-Up Entity shares are sold by the Investor within three years, or in case the Start-up Entity is placed into voluntary liquidation during this period. However, there will be no retroactive adjustment of the taxation in certain exceptional cases exhaustively listed in the Draft Law, such as the bankruptcy of the Start-Up Entity or the death, disability, or permanent incapacity of the taxpayer to work.

Conditions to be fulfilled by the Start-Up Entity

The Start-Up Entity must be a resident collective entity or a PE of a collective entity established in an EEA member state

To be eligible for the Start-Up Tax Credit, the investment must be made in a fully taxable resident collective entity incorporated in the form of a capital company or a cooperative company, or in a fully taxable collective entity that is a resident of a State that is a party to the Agreement on the European Economic Area ("EEA"), provided that such entity is subject to a corporate income tax comparable to the Luxembourg corporate income tax and has a domestic permanent establishment ("PE").

To be eligible, the Start-Up Entity receiving the investment must be:

• A capital company or cooperative (e.g., SA, Sàrl, SCA);
• Fully subject to Luxembourg corporate tax, or subject to an equivalent tax regime in another EEA member state and operating via a Luxembourg PE.

The Start-Up Entity must have been incorporated for a period not exceeding 5 years

The Start-Up Entity must have been incorporated for no more than five years at the end of the tax year for which the Start-Up Tax Credit is claimed (i.e., as of 31 December of the year for which the Start-Up Tax Credit is claimed, regardless of whether the Start-Up Entity has a divergent financial year-end).

The Start-Up Entity must meet an employee number threshold and a total assets or annual turnover threshold

The Start-Up Entity must:

• employ fewer than 50 employees (the "Employee Criterion"); and
• have total assets or an annual turnover not exceeding EUR 10,000,000 (the "Size Criterion") as at the end of the financial year ending during the tax year for which the Start-Up Tax Credit is claimed, i.e., 31 December (in the case of a financial year aligned with the calendar year) or another date (in the case of a divergent financial year – for example, if the financial year ends as of 30 June each year, the criteria are to be assessed as of 30 June N for the tax year N).

If the Start-Up Entity is part of a group, the Employee Criterion and the Size Criterion must be met at group level and certified by a statutory auditor (réviseur d'entreprises agréé) or a chartered accountant.

Where a group is involved, all entities forming part of the group must, at the end of the tax year in respect of which the Start-Up Tax Credit is claimed, have been incorporated for less than five years. A group means the Start-Up Entity and its related enterprises as defined by the Draft Law.

The Draft Law introduces a bespoke definition of "related enterprises" for the purpose of determining whether a company meets the SME criteria on a consolidated basis. However, this definition is considered by the Council of State as legally fragile, and thus it formally opposed this provision in its current form. It departs from the standard definitions found in the Law on Commercial Companies and the Luxembourg Income Tax Law, leading to interpretative uncertainty. In particular, the concept of indirect control is undefined, and its application could vary from one case to another.

In this respect, the Council of State urges alignment with established legal standards or, at the very least, the introduction of precise criteria and examples, without which legal certainty for both companies and investors is compromised.

Footnote

1 See below about this.

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