Luxembourg

Tax credits benefitting companies investing in digital and green transformation – Luxembourg

Brief Summary

From 1 January 2024 onward, investment tax credits will change in the following ways:

  • The tax credit for additional investments would be extinguished and replaced by a tax credit for investments and operational expenses incurred during an eligible taxpayer’s digital transformation or ecological and energy transition.
  • The tax credit for overall investments would increase from 8% to 12%, regardless of the amount invested (excluding the €150,000 threshold) during the relevant financial year. This rate would increase to 18% for investments and operational expenses incurred during an eligible taxpayer’s digital transformation or ecological and energy transition.

Detailed Look

On 19 December 2023, the Luxembourg Chamber of Deputies adopted a law to modernize the current investment tax credit; it will take effect 1 January 2024. The passed law was amended during the legislative process to address the oppositions posed by the Council of State.

Now that the law has been adopted by the Parliament, the legislative process will continue until the law is published in the official journal, which should take place before the end of the year. However, this should not impact how the new measures will be applied from 1 January 2024 onward.
 

Main changes

Currently, the investment tax credit has two components:

  • The tax credit for overall investments:
        o 8% for the first €150,000 of investment; and
        o 2% for investments above €150,000; and
  • The tax credit for additional investments: 13%.

The current tax credit only applies to investments in assets and does not cover any operational expenses incurred by taxpayers.

From 1 January 2024 onward, investment tax credits will change in the following ways:

  • The tax credit for additional investments would be extinguished and replaced by a tax credit for investments and operational expenses incurred during an eligible taxpayer’s digital transformation or ecological and energy transition.
  • The tax credit for overall investments would increase from 8% to 12%, regardless of the amount invested (excluding the €150,000 threshold) during the relevant financial year. This rate would increase to 18 % for investments and operational expenses incurred during an eligible taxpayer’s digital transformation or ecological and energy transition.
     

Targeted investments: Digital transformation and ecological and energy transition

Digital transformation is defined as achieving an innovative process or an organizational innovation through the implementation and use of digital technologies. It must meet at least one of the following goals:

  • Redefine a production process from end to end to substantially improve productivity, energy efficiency, or material efficiency;
  • Introduce an innovative economic model (including a circular economy);
  • Entirely redefine the provision of services to create new value for the company’s stakeholders;
  • Significantly transform the company’s organizational structure to create new value for its stakeholders; and
  • Significantly redefine all corporate processes to substantially increase the identification and mitigation of any digital risks in the company’s activities.

Ecological and energy transition would be defined as any change that reduces the environmental impact, from energy production or consumption to use of resources. It would have to be a significant technical or equipment change and should aim to:

  • Significantly improve the energy efficiency of a production process and realize at least 20% energy savings;
  • Significantly decarbonize a production process to reduce CO2 emissions by at least 40%;
  • Produce or store the energy produced from non-fossil renewable sources;
  • Reduce the air pollution at production sites;
  • Significantly increase the material efficiency of a production process by reducing the use of primary raw materials by at least 15% or replacing primary raw materials with at least 20% sub-products or secondary raw materials; or
  • Implement a production process that allows longer use of products through reuse.
     

Eligible investments and operational expenses

The scope of eligible investments and operational expenses would be broad and include:

  • Investments in depreciable assets with a depreciable life longer than three years;
  • Investments in software or patents other than those acquired from an associated enterprise;
  • Expenses incurred for the use of patents and software granted by a non-associated enterprise;
  • Expenditure on advisory, diagnostic and technical support services provided by external providers that are not related to operating expenses in the normal course of the company’s business, such as regular tax or legal advice, or advertising;
  • Personnel costs directly allocated to digital transformation or the company’s ecological and energy transition; and
  • Training expenditure for staff directly involved in digital transformation or the company’s ecological and energy transition.
     

Procedure applicable to the investment tax credit for digital transformation or ecological and energy transition

The tax credit for investments related to digital transformation or ecological and energy transition will be subject to the following procedure:

First, the taxpayer will need to submit its project to the Ministry of Economy, which will verify the eligibility of the investment and operational expenses related to the digital transformation or ecological and energy transition. The draft law had initially foreseen that the attestation would be based on the guidance from a specific inter-ministerial commission. Following opposition from the Council of State, the legislator decided that the creation and functioning of such an advisory commission would need to be governed by a governmental regulation. The provision in the initial draft of the law that distinguished between investments below or above €20,000 has been removed, meaning that all investments could be eligible.

Second, for the purposes of the tax return, the taxpayer will need to submit a request within the two months following the close of the financial year during which the investment and operational expenses were incurred. Then, after verification the Ministry of the Economy will issue a certificate confirming that the investment and operational expenses are legitimate and that they meet the objectives of the digital transformation or the ecological and energy transition. Such certificate would be issued within nine months following the close of the financial year. The Luxembourg Tax Authority will be bound by the certificate and the information it contains.

This legislative modification encourages competition among companies in Luxembourg and demonstrates Luxembourg’s clear interest in incentivizing digital transformation and ecological and energy transition.

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