Luxembourg publishes draft law on modernization and expansion of the investment tax credit

• The Luxembourg Government sent to Parliament a draft law aiming at substantially reforming 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, as well as increase the rate for the existing "global" ITC.

Executive summary

On 13 July 2023, the Luxembourg government deposited with Parliament a draft law (Draft Law) that would substantially reform the investment tax credit (ITC).

According to the Draft Law, as of tax year 2024, a new ITC will be available for additional investments as well as certain expenses incurred by Luxembourg businesses in view of investments in digital transformation or the ecological and energy transition. The credit will amount 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 investments will be increased from 8% to 12%, while the complementary ITC will be abolished.

Detailed discussion

Current regime

Currently, the ITC has two components — a "complementary" and a "global" tax credit. The "complementary" tax credit of 13% is 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 is 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 increase 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 existing ITC

The Draft Law increases the rate of the global ITC from 8% to 12% and abolishes the threshold of €150,000. As under the existing ITC, the rate increases by 2% to 14% for certain investments aiming to protect the environment or create jobs for disabled persons. It also abolishes the complementary ITC.

New ITC on investments and expenses in view of digital transformation or ecological and energy transition

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

Unlike the current regime, which only applies to assets, the new ITC will also be granted for expenses. Under the Draft Law, qualifying investments and business expenses will be eligible for an 18% ITC, except investments in tangible depreciable assets for which the credit will be 6%. However, in total, such investments in tangible depreciable assets will also be entitled to a tax credit of 18% (12% global tax credit + 6% additional tax credit). The credit is calculated on basis of 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 the right to use, patents or software (except if 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; 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. Investments and operating expenses to bring the company into compliance with obligations arising from environmental protection legislation, motor vehicles 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 will not be eligible for the global ITC.

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 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 Draft Law contains a list of objectives that investments or 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 production energy efficiency or material 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 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 this 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. Requests for certificates need to be filed within a certain deadline. To obtain a certificate, the taxpayer must also obtain an attestation regarding the eligibility of the investments and expenses from the Minister of the Economy, together with the Ministers responsible for Finance, the Environment and Energy. The request for the attestation of eligibility needs to 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 of eligibility has been filed. Only investments and expenses amounting to at least €20,000 excluding VAT over a period of three consecutive years will be eligible for the attestation. Details on the information to be provided when requesting the attestation of eligibility and the process for requesting certificate are expected to be clarified in a Grand-Ducal decree.

Other changes

According to the Draft Law, except for the global ITC on software, both the global ITC and the new ITC can be carried forward for 10 years, as is the case currently.

Implications

The Draft Law will significantly reform the ITC. Taxpayers should evaluate whether they are eligible for the new ITC from 2024 and what the impact of the change will be on the existing ITC (and the abolition of one of the current ITCs). 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.