The DRAFT Law proposition of the tax credit in Luxembourg: an in-depth modernisation
In brief
On 13 July 2023, a draft Law (n°8276, hereafter “the Draft Law”) was released, aiming to revamp the investment tax credits available under Article 152bis of the Luxembourg Income Tax Law (LITL).
What is the purpose of the draft Law?
- Encourage and accelerate investment in key areas such as digital transformation and the ecological and energy.
- Strengthen the competitiveness of Luxembourg companies by further stimulating innovation, while promoting the development of knowledge and skills in (i) digital transformation and (ii) ecological and energy transition.
The most significant change to the rules, in addition to the increase of applicable rates, consists of an inclusion of certain operating expenses connected with the digital / ecological transformation on which a 18% tax credit may apply. This change, which is planned to come into effect in 2024, is expected to provide a strong incentive for companies to accelerate their digital and ecological/ energetic transition.
Current scope and application of the investment tax credit
The current regime has two components that can be applied simultaneously, that being a tax credit for additional investment and a tax credit for overall investment.
- The tax credit for additional investment 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 tax credit for overall investment of 8% up to the first tranche of €150,000 and of 2% for the tranche exceeding this amount is granted for the acquisition of qualifying new investments during a given tax year.
However, under the current regime, the existing legal framework is limited to investment expenses in tangible depreciable assets. It then excludes operating expenses in general including expenses made by companies as part of digital and technological transformation or the energy and ecological transition.
Proposed changes and opportunities offered
The proposed amendments introduced by the draft Law to Article 152bis of the Luxembourg Income Tax Law (LITL) would result notably in the following changes:
Repeal of the tax credit for additional investment
The existing 13% of the additional investment tax credit is expected to be fully repealed.
Introduction of an 18% tax credit for investments and operating expenses connected with digital and ecological and energy transformation (the new DEET tax credit)
The new DEET tax credit is expected to apply to certain investments and operating expenses connected[1] with digital and ecological transformation provided they comply with at least one of the objectives listed for each category respectively.
Qualifying objectives for digital transformation include notably:
- 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; or
- implementing an innovative business model including circular economy; or
- modernising the organising of the company itself; or
- strengthening the digital security of the company.
The objectives listed in the context of the ecological and energy transition include (but not limited) for instance:
- to significantly improve the energy and / or material efficiency in a production process by saving at least 20% of the energy used or to decarbonise a production process to reduce greenhouse gas emission by at least 40%; or
- Self-consuming energy produced or storing from renewable non-fossil sources; or
- Promoting the extension of the use of products through reuse.
For investments qualifying in tangible depreciable assets, the DEET tax credit will be limited to 6% considering that these assets are expected to benefit from the 12% tax credit for global investment, hence reaching the expected 18% tax credit overall. Income derived from investment / expenses related to the acquisition or development of software / patents would not be eligible to the patent box regime foreseen under Article 50ter LITL to the extent the company benefits from a DEET tax credit on these investments / expenses.
Also, excluded from the DEET tax credit, are:
Assets that are depreciable over a period of less than three years,
Automobile vehicles,
Investments and operating expenses to bring the company into compliance with obligations arising from environmental protection legislation and other legal and regulatory provisions applicable to the establishment and operation of industrial and commercial companies.
The benefit of the DEET tax credit requires obtaining:
An eligibility certificate issued by the Minister of Economy, together with the Ministers in charge for finance, the environment and energy, attesting the eligibility of the investment/operating expenses in relation to a project of digital/ecological transformation as defined under the new Article 152bis LITL; and
An annual certificate issued by the Minister of Economy proving the reality of the project and investment/operating expenses. Such a certificate should be attached to the corporate tax return filed with the Luxembourg tax authorities every year.
Point of attention: Projects whose cumulative investment/operating expenses over the three consecutive fiscal years of the realisation of the project, would remain below €20,000 (excluding VAT) will not be considered in obtaining the eligibility certificate.
Increase from 8% to 12% of the rate applicable to the tax credit for overall investment [2]
The existing tax credit for overall investment remains in place but with (i) an increased rate reaching now 12% and (ii) a repeal of the €150,000 threshold. We note that for investments in fixed assets qualifying for special depreciation, the applicable rate is increased to 14%.
The tax credit for overall investment related to the acquisitions of software is capped at 10% of the corporate income tax due for the fiscal year during which the financial year closed and where the acquisition of the software was made. Similar as for the DEET tax credit, income derived from the software would be out of scope of the patent box regime foreseen under Article 50ter LITL.
Next steps
The draft law reshaping the investment tax credit is welcomed and demonstrates a clear ambition of the Luxembourg Government to help companies achieve their digital and ecological transformation journey. If voted in due time, the new regime will take effect as from 2024 tax year (i.e. financial year closing on or after 1 January 2024).
However, there are some uncertainties around the question of how the new investment tax credit would fit into the upcoming Pillar Two rules. As currently foreseen, the credits would not be eligible as qualified refundable tax credits or marketable transferable credits that could qualify as income for the Pillar Two rules. Therefore, the tax credits would reduce the Luxembourg corporate income tax, and the impact on the jurisdictional effective tax rate should be reviewed in detail for in-scope groups. In addition, the timing of issuance of the eligibility and yearly certificate would have to be monitored to avoid lengthy procedures that would lower the attractiveness of the new provisions.
Notes:
[1] The 18% DEET tax credit covers the following investments and operating expenses:
- Investments in tangible depreciable assets other than buildings, live agricultural livestock and mineral and fossil deposit;
- Investments in software or patents and expenses incurred for the use or the right to use patents or software, other than those acquired from or granted by a related company;
- Expenses for consulting, diagnostic and technical support services provided by external providers that are not related to the company’s normal operating expenses (e.g., recurrent tax or legal advisory services or advertising expenses);
- Personnel expenses directly assigned to the company’s digital transformation or ecological and energy transition;
- Training expenditures for personnel directly assigned to the company’s digital transformation or ecological and energetic transition.
[2] As a reminder, the tax credit for overall investment applies to:
Investments in depreciable tangible assets other than buildings, livestock, and mineral and fossil deposits;
Investments in sanitary and central heating installations incorporated into hotel buildings (under certain conditions);
Investments in certain buildings qualifying as social investment,
Investments in fixed assets qualifying for special depreciation,
Acquisition of software, insofar as they have not been acquired from a related company (to the extent not otherwise qualifying under the DEET tax credit already).
Contact us
Murielle Filipucci
Tax Partner, Global Banking & Capital Markets Tax Leader, PwC Luxembourg
Tel: +352 62133 31 18
