As from fiscal year 2024, new rules apply to the Luxembourg investment tax credit (“ITC”) mechanism provided by Article 152bis of the Luxembourg income tax law (“LITL”). The mechanism has been revised, and its benefits extended to investments and expenses incurred in the context of digital transformation as well as energy and ecological transition, subject to the completion of a specific process.
Summary of existing rules
Until fiscal year 2023 the ITC had the following key features:
- Global ITC granted for investment in new eligible assets during the fiscal year computed on the basis of the acquisition price or cost of the assets. It amounted to 8% for the first tranche of investment up to EUR 150,000 and 2% for the portion exceeding EUR 150,000 (rates of 9% and 4% applied to fixed assets eligible to the special amortization scheme under Article 32bis LITL generally corresponding to investments made in the interests of environmental protection, energy saving and the adaptation of workstations for disabled workers.).
- A complementary ITC was granted for additional investments in eligible assets during the fiscal year. It amounted to 13% and was computed on the difference between the net book value of eligible assets at year-end and the average book value of eligible assets during the previous five years (a minimum EUR 1,850 applied).
Eligible assets notably include depreciable tangible assets other than buildings, farm livestock and mineral and fossil deposits. The ITC was credited against the tax liability of eligible taxpayers (enterprises realizing commercial profits which includes fully taxable corporate entities) and unused amounts could be carried forward for 10 years.
Overview of the new rules as from fiscal year 2024
- The complementary ITC is no longer applicable.
- Global ITC: A single rate of 12% will apply on the acquisition price or cost of the assets (14% for assets qualifying for the special amortization scheme). Any unused amount of the global ITC will continue to be carried forward for 10 years except when granted in relation to a software. Investments in software eligible for the new ITC, as described below, are not eligible for the global ITC. Other rules relating to the global ITC continue to apply.
- A new ITC for investments and operating expenses to engage in digital transformation, ecological and energy transformation (the “New ITC”). Key features are detailed below.
New ITC – Eligible investments and expenses
Updated Article 152bis LITL lists the types of investments and expenses eligible to the New ITC and the objectives to be achieved by such investments and expenses to be eligible.
Type of investments and expenses
- Investments in tangible depreciable assets (other than buildings, livestock, and mineral and fossil deposits), investments in software or patents other than those acquired from a related party (as defined under Luxembourg transfer pricing rules);
- Expenses incurred for the use or the right to use, patents or software other than those granted by a related party (as defined under Luxembourg transfer pricing rules);
- Expenses on consultancy, diagnostic and technical support services provided by external service providers that are not related to the normal operating expenses of the company, such as regular tax or legal advisory services, or advertising;
- Expenses on staff directly assigned to the company's digital transformation or ecological and energy transition;
- Training costs for staff directly assigned to the company's digital transformation or ecological and energy transition.
Objectives
The above listed expenses and investments must also meet one of the listed objectives in relation to either digital transformation or ecological and energy transition.
For digital transformation, the objectives include: (i) significantly redefining an entire production process to improve productivity, energy, or material efficiency, (ii) implementing an innovative economic model (including circular economy), (iii) significantly redefining the service delivery process, (iv) significantly transforming the business organisation or (v) substantially strengthening the IT security of all processes.
For the ecological and energy transformation, the objectives include: (i) improve the energy efficiency of a production process by at least 20% compared to the average consumption of the five years prior to the implementation of the process, (ii) decarbonise a production process by reducing greenhouse gas emissions by at least 40% compared to the average emission of the five years prior to the implementation of the process, (iii) produce or store renewable energy (as defined by law) for own consumption (iv) improve the material efficiency of a production process resulting in a reduction in the use of primary raw materials of at least 15% or the substitution of primary raw materials by by-products or secondary raw materials of at least 20% compared to the average use of primary raw materials in the five years preceding the implementation of the process, or (v) promote the extended use of products through reuse.
Exclusions and limitations
Assets depreciated over a period of less than three years, self-propelled vehicles and investments and expenses aimed at complying with obligations arising from environmental protection legislation and legal and regulatory provisions applicable to the establishment and operation of industrial and commercial undertakings companies are excluded.
New ITC – Amount and procedure
Amount and basis of calculation
- Eligible expenses and assets (other than depreciable tangible assets): 18%, calculated on the tax-deductible portion of the eligible expense or the assets’ acquisition price or cost.
- Eligible depreciable tangible assets: 6% (reaching 18% in combination with the 12% global ITC) calculated on the basis of acquisition price or cost of the assets.
- The New ITC is creditable against the income tax liability of the Luxembourg enterprise (or Luxembourg company’s corporate income tax liability) due the same year. The remaining amount can be carried forward for 10 years.
Procedure
- Before making the investment or expense, taxpayers must apply to the Ministry of Economy for a statement of eligibility to the New ITC. The application should detail several aspects of the investment/expense, in particular their financing, nature and objective. The application will be analysed by a specific commission, which should provide an answer within three months.
- After the end of the fiscal year, taxpayers must request a certificate of compliance from the Ministry of Economy which should verify the reality and eligibility of the investments and/or expenses based on the documentation provided by the taxpayer. The deadline for the request is two months after the end of the fiscal year and the response should be provided within nine months of the end of the fiscal year.
- When filing tax returns, in addition to the existing ITC forms, taxpayers must attach the certificate of compliance issued by the Ministry of Economy.
Conclusion and next steps
The changes to the ITC mechanism provide a significant incentive for taxpayers engaged in digital transformation, energy and ecological transition.
The New ITC will require taxpayers to apply for a statement of eligibility before proceeding with the relevant expenses or investment. A fully digital procedure to request such a statement will be introduced and, in the meantime, appropriate forms are already available online for taxpayers to proceed with such a request.
Share on
