Luxembourg enacts law on modernization and expansion of investment tax credit

• Luxembourg substantially reformed the investment tax credit (ITC) that qualifying taxpayers may claim against their income tax.
• The amendments effectively create a new ITC covering investments and expenses incurred by Luxembourg businesses in view of digital transformation or ecological and energy transition, and increase the rate for the existing global ITC.

Executive summary

In December 2023, the Luxembourg Parliament approved a draft law (Law) substantially reforming the ITC. The Law is largely in line with the wording of the initial draft law published in July 2023, with changes consisting mostly of provisions addressing certain procedural aspects.

Under the Law, as of tax year 2024, a new ITC is available for additional investments as well as certain expenses incurred by Luxembourg businesses making investments in digital transformation or the ecological and energy transition. The credit amounts to 6% for investments in tangible depreciable assets and 18% for expenses and investments in software and patents.

In addition, the rates of the existing ITC for additional items of investment are increased from 8% to 12%, and the complementary ITC was abolished.

Detailed discussion

Former regime

The former ITC had two components — a complementary and a global tax credit. The complementary tax credit of 13% was determined by comparing the adjusted net book value of qualifying assets to the average net book value of such assets over the last five years. The global tax credit was calculated on the acquisition price of qualifying new investments in the period and amounts to 8% up to €150,000 per year, plus 2% on any additional amount. These rates increased from 8% to 9% and from 2% to 4% for certain investments aiming to protect the environment or create jobs for individuals with disabilities.

Changes to former ITC regime

The Law increases the rate of the global ITC from 8% to 12% and abolishes the €150,000 threshold. As under the former ITC regime, the rate increases by 2% to 14% for certain investments aiming to protect the environment or create jobs for individuals with disabilities. The new Law also abolishes the complementary ITC.

New ITC on investments and expenses for digital transformation or ecological/energy transition

The Law introduces a new ITC, which is available from tax year 2024 on qualifying investments and expenses incurred by Luxembourg companies as part of their digital transformation or ecological and energy transition.

Unlike the former regime, which only applied to assets, the new ITC is also granted for expenses. Qualifying investments and business expenses are eligible for an 18% ITC, except investments in tangible depreciable assets for which the credit is 6%. However, in total these investments in tangible depreciable assets are also entitled to a tax credit of 18% (12% global tax credit + 6% additional tax credit). The credit is calculated based on the acquisition cost or production cost of qualifying investments made during the financial year or the amount of qualifying deductible operating expenses for the financial year.

Qualifying investments and expenses include: investments in depreciable tangible assets other than buildings; investments in software or patents (other than those acquired from related parties); expenses incurred for the use of, or right to use, patents or software (unless the (right to) use is granted by a related party); fees for consultancy, diagnostic and technical support services that are provided by external service providers and are unrelated to the company's ordinary operating expenses; and employee costs and employee training costs in relation to staff directly involved in the company's digital transformation or ecological and energy transition. Investments and operating expenses for motor vehicles, company compliance obligations arising from environmental protection legislation, and assets with a useful life shorter than three years are expressly excluded.

If investments in and expenses related to software and patents benefit from the ITC, income from these assets cannot benefit from an intellectual property regime. Moreover, software covered by the new ITC is not eligible for the global ITC.

The Law defines digital transformation as a process or organizational innovation by means of implementing and using digital technologies.

Ecological and energy transition covers material changes of a technical nature or concerning equipment that reduce the environmental impact in the production or consumption of energy or usage of resources, such as decarbonization, reduction of emissions or the reuse of products, as well as the possibility to store renewable energies.

The Law contains a list of objectives that investments or expenses must fulfill to be eligible for the new ITC. Qualifying objectives for digital transformation include, for example, redefining a company's entire production process by substantially improving its production energy efficiency or material efficiency or significantly redefining a company's entire range of services to create new value for the company's stakeholders. The objectives listed in the context of ecological and energy transition include, for instance, to significantly improve the energy efficiency in a production process by saving at least 20% of the energy used or to decarbonize a production process to reduce greenhouse gas emissions by at least 40%.

To benefit from the new ITC, the taxpayer must attach to its tax return a request to apply the ITC and a certificate issued by the Ministry of the Economy. The indications in the certificate are binding on the tax administration. Requests for certificates need to be filed within a certain timeframe. To obtain a certificate, the taxpayer must also obtain from the Minister of the Economy an attestation regarding the eligibility of the investments and expenses. The taxpayer's request for an eligibility attestation must contain certain information, such as a description of the planned investment and the start date and end date of the project. The certificate will only cover investments made and expenses incurred after the request for the attestation has been filed. Details regarding the information to be provided when requesting the attestation of eligibility and the process for requesting a certificate may be clarified in a Grand-Ducal decree.

According to the Law, except for the global ITC on software, the global ITC and the new ITC can be carried forward for 10 years, as was the case under the former regime.

Implications

The Law significantly reforms and modernizes the ITC. Taxpayers should evaluate whether they are eligible for the new ITC as from tax year 2024 and how they will be impacted by the changes to the former ITC (and the abolition of the former complementary ITC). Timing will be key, as the new ITC will only be available from financial years 2024 and requires an attestation of eligibility, as well as a certificate that must be timely requested. Taxpayers should liaise with their tax professional to assess the potential implications and opportunities.