The new investment tax credit in Luxembourg: a boon for the financial sector?

The Luxembourg government has proposed a major overhaul of the country's investment tax credit (ITC) regime in a Draft Law amending article 152bis of the amended law of 4 December 1967 on income tax. The changes, which are expected to come into effect in 2024, are designed to make the ITC more attractive to businesses and to encourage investment in key areas such as digital transformation and the ecological and energy transition.

Current scope and application of the ITC

The current ITC regime provides an incentive to businesses in the form of a tax credit for specific investments made in tangible assets other than buildings and in software. The credit is calculated as a percentage of the investment amount and can be used to offset a company's corporate income tax liability. The investment must be made by a Luxembourg entity but can be deployed across the European Economic Area.

The current regime has two components that can be applied simultaneously, that being a complementary ITC and a global ITC. The complementary ITC of 13% is calculated on the increase in investments in qualifying assets made during a given tax year, in comparison to the average net book value of qualifying assets over the last five years. The global ITC of 8% up to the first tranche of 150,000 euros and of 2% for the tranche exceeding this amount is granted for the acquisition of qualifying new investments during a given tax year.

In consequence, entities that typically do not heavily invest in tangible assets did not benefit much from the effects of the current ITC regime.

Proposed changes and their opportunities for businesses investing in the transition to a more sustainable economy

The Draft Law abolishes the complementary ITC and increases the rate of the global ITC from 8% to 12%, while removing the investment bracket of 150,000 euros.

Most importantly however, the Draft Law introduces a new ITC on qualifying investments and, unlike the current regime, also on expenses incurred by Luxembourg companies as part of their digital transformation or ecological and energy transition. The Draft 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 reduces 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 Draft Law contains a list of objectives that investments and expenses must fulfill to be eligible for this new ITC. Qualifying objectives for digital transformation include, for example, redefining the entire production process of a company by substantially improving its productivity energy efficiency or significantly redefining the entire range of services provided by a company to create new value for the company’s stakeholders. The objectives listed in the context of the 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%.

The rate of the new ITC is set at 18%, except for investments in tangible depreciable assets for which the credit will be 6%. However, given that these investments are expected to also qualify for the 12% global ITC, they will still benefit from an overall ITC of 18%.

The new ITC is calculated on the acquisition or production cost of qualifying investments made during the financial year, respectively on the amount of qualifying deductible operating expenses for the financial year.

In practice, 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 the right to use, patents or software (except if granted by a related party), fees for consultancy, diagnosis and technical support services that are provided by external service providers and are unrelated to the company’s ordinary operating expenses, as well as employee costs and employee training costs in relation to staff directly involved in the company’s digital transformation or ecological and energy transition.

It is worth noting that investments and operating expenses made to bring the company into compliance with obligations arising from environmental protection legislation or related to motor vehicles and assets with a useful life shorter than three years are expressly excluded.

The proposed changes to the ITC are expected to benefit businesses in several ways:

• The increased rate of the global ITC will provide businesses with a greater incentive to invest, helping them to grow and create jobs
• The abolition of the threshold for the global ITC will make the credit more accessible to smaller businesses. This will help to level the playing field between large and small businesses
• The introduction of a new ITC for investments in digital transformation or the ecological and energy transition will help businesses to finance these important investments which are essential to remain competitive in the global economy and to meet the challenges of climate change
•  The abolition of the complementary ITC will simplify the tax code and make it easier for businesses to claim tax credits. This will save businesses time and money

Specific considerations for the financial sector

Because of the above, a whole range of taxpayers, such as banks or other players in the financial sector, might have the possibility to benefit from this new ITC. Beyond considerations of the ecological and energy transition aspects of the new ITC, such entities are typically heavily active in data processing, and highly software and technology driven and could thus possibly benefit from the new ITC in view of their digital transformation process.

For instance, a bank’s need for digital transformation is largely driven by customer preferences and expectations such as handling financial transactions via mobile banking, increased use of digital and online services or increased demand for digital payment methods. Digital tools and techniques used in the banking sector also comprise digital assistants or chatbots to provide customers with support to solve problems or artificial intelligence-based analytics that help process customer data and thus help in analyzing and managing data. Therefore, tax year 2024 may be the right time to start projects that were anyway looming on the horizon, as the related investments and expenses would possibly be eligible for the new ITC.

Moreover, and likely also because of the above and the general trend on accelerated digitalization, cyber security remains a key topic in the financial sector as well as an expectation from customers and is crucial from a corporate reputational risk perspective. With increased digitalization and stored data, better protection is always needed. In this regard, it is worthwhile to note that in the comments to the Draft Law, cyber security is specifically mentioned as part of the items that could be considered in view of that new ITC. Consequently, also in this regard, it would be interesting for impacted players in the financial sector to analyze whether projects still on the to do list could possibly qualify for the new ITC.

The new ITC is a significant opportunity for financial institutions in Luxembourg. By investing in digital transformation and other technologies, financial institutions can improve their efficiency, competitiveness and resilience. Players in the financial sector should thus review their list of planned projects to assess whether they could benefit from the new ITC regime and timeously start the procedures in view of obtaining the attestation for eligibility for a relevant project.

What is the process to benefit from the ITC?

When considering projects that could possibly qualify for the new ITC, timing is key as certain administrative procedures must be completed before projects are started.

To benefit from this new incentive, the taxpayer will have to attach a certificate issued by the Ministry of the Economy to its tax return. Requests for such certificate need to be filed within a certain deadline and are subordinated to the condition of obtaining an attestation regarding the eligibility of the investments and expenses that will be issued by the Minister of the Economy, together with the Ministers responsible for Finance, the Environment and Energy, after receiving the opinion of an advisory commission. The request for the attestation of eligibility needs to contain certain information, such as a description of the planned investment and the start and end date of the project.

The certificate will only cover investments made and expenses incurred after the request for the attestation of eligibility has been filed. It becomes key for projects that may benefit from the new ITC to carry out the analysis and relevant steps at an early stage to secure benefit from this measure.

Overall, the ITC is a powerful tool that can help businesses to create value and achieve their strategic goals. The proposed changes to the ITC are likely to make it even more attractive to businesses, and they could have a positive impact on the Luxembourg economy.

If your operations are considering embarking on new projects, in particular those linked to digital transformation or the ecological and energy transition, you should explore whether the ITC could apply and assess how it could benefit your business.