On 4 April 2025, Draft Law No. 8526 was submited to the Luxembourg Parliament (Chambre des Députés) and intends to introduce, as from fiscal year 2026, a tax credit for private individuals investing in Luxembourg startups amounting to 20% of their equity investment.
The measure is designed to ease early-stage financing of innovative startups by private individuals.
Background to the proposal
The proposal implements part of the 2023-2028 governmental coalition program to enhance the economic environment for startups. Already in 2022, the Minister of Finance commissioned a report assessing the Luxembourg start-up ecosystem and found that early-stage financing is key for a start-up success. As observed by the government, such measure aligns with the findings of the 2024 Draghi report (“The future of European competitiveness”) that the lack of early-stage financing pushes EU startups to transfer their activity outside of the EU and more recently the EU Commission communication of January 2025 (“A competitiveness Compass for the EU”) calling for an improvement of the European framework regarding the funding of innovative startups.
Eligible taxpayers
The tax credit will be available to Luxembourg resident individuals and non-resident individuals taxable in Luxembourg under the assimilation regime. The taxpayer must act in the context of the management of its private wealth, thus excluding investments through an enterprise. Employees and founder of the startup entity are excluded from the measure.
Eligible startups
Form and tax regime
A fully taxable Luxembourg resident company or a company resident within the European Economic Area subject to a corporate tax equivalent to the Luxembourg corporate income tax and engaged in innovative activities through a Luxembourg permanent establishment.
Newly formed
Size
It has less than 50 employees and either its total balance sheet or its turnover does not exceed 10 million.
Group membership
When the startup entity is part of a group, the condition pertaining to the size must be assessed at the level of the group and its fulfilment be certified by a chartered accountant or an auditor. Each entity of the group must have been formed since less than 5 years. There is a group when the start-up entity has at least one associated enterprise. The latter being another entity, alone or with other associated enterprises, (i) with a relationship of at least 25% in terms of capital or voting rights, (ii) holding or controlling (through an agreement) the majority of the voting rights, (iii) having the power to designate or remove the majority of the management, or (iv) has a significant influence on the management of another entity through a contract or statutory provision.
Innovative activity
The start-up must be engaged in an innovative activity. This requirement is met when the entity has at least two persons working full-time (not necessarily employees, managers/directors are included but external contractors are excluded) and during at least one of the three financial years preceding the investment, at least 15% of the entity’s operating expenses were dedicated to research and development (condition to be realised within the first year if the investment takes place the year of formation). Eligible expenses do not include subcontracted activities. An auditor or chartered accountant must certify the second condition is met.
R&D and relevant expenses: R&D is broadly defined as work to systematically increase knowledge, and use this knowledge to develop new applications, whether for products, services, processes, methods or organizations. This definition is aligned with the one used in Draft Law 8314 intending to introduce subsidies (capital or loans) for R&D and innovative activities. Relevant expenses include remuneration of staff allocated to R&D activities and any material used for such activities.
The Draft Law also lists excluded startup entities which comprises law firms, audit firms, entities active in the real estate sector, venture capital companies under the law of 15 June 2004, entities with listed securities, entities formed upon a tax neutral merger or demerger, entities having distributed dividends or proceeded to a share capital reduction since incorporation (unless to absorb losses) and entities required to repay State aid under EU legislation.
Investment by the taxpayer
Form and timing
The investment must be in in cash and take place upon formation or during a subsequent share capital increase. Subscription and payment must take place the same year.
Minimum/maximum investment
The taxpayer must invest at least EUR 10,000 per startup entity. When the participation reaches 30% of the share capital of the startup, additional investments are not eligible.
Maximum capital raised from eligible taxpayers amounts to EUR 1,500,000 and additional investors cannot benefit from the tax credit.
Direct holding
The taxpayer must hold the relevant shares directly excluding any indirect holding (even through tax transparent entities).
Minimum period
The taxpayer commits to hold the shares in the share capital of the startup for at least 3 years starting as from the end of the fiscal year for which the tax credit is requested. The holding period is annually documented in the tax returns with retroactive adjustment if it is not met (certain exceptions apply, startup bankruptcy, taxpayer’s disability).
Request for the tax credit
The tax credit amounts to 20% of the invested amount (capital and share premium). The maximum tax credit granted for one fiscal year amounts to EUR 100,000 and unused amount is carried forward to subsequent fiscal year. It is non-refundable.
For taxpayers under joint taxation investing in startups, the conditions are to be analysed separately.
The request must take place through a tax return and taxpayers not subject to mandatory tax returns filing will be required to file a tax return for the three years following the granting of the tax credit.
Documentary evidence to be attached to the tax return include (i) a certificate issued by the startup confirming the paid-up capital within two months after the issuance, the percentage held by the taxpayer and the capital subscription by taxpayers eligible to the tax credit and (ii) a certificate issued by the startup entity confirming its eligibility.
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