New draft law improves the Luxembourg investment tax credits to accelerate sustainability transformation

Article 152bis LITL currently offers two forms of investment tax credits: 

• a tax credit for overall investment (“TCOI”) determined based on the acquisition price or production costs of certain qualifying assets (e.g., tangible depreciable assets) acquired during a given accounting period. The tax credit amounts to 8% for the tranche up to EUR 150,000 and 2% for the tranche exceeding EUR 150,000. 

• a tax credit for additional investment (“TCAI”) representing 13% of the additional investment in qualifying assets (e.g., tangible depreciable assets) determined under a specific formula. 

The proposed amendments introduced by the draft Law to article 152bis LITL would result notably in the following changes:

1. Repeal of the tax credit for additional investment

The existing 13% TCAI is expected to be fully repealed. 

2. Introduction of a 18% tax credit for investments and operating expenses connected with digital and ecological transformation (“the DET tax credit”)

The new DET tax credit is expected to apply to certain investments and operating expenses connected with digital and ecological transformation, provided they comply with at least one of the objectives listed for each category respectively, as summarised in the table below. 

For investments in tangible depreciable assets, the DET tax credit will be limited to 6% considering that these assets are expected to benefit from the 12% tax credit for global investment (further described below), 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 DET tax credit on these investments/expenses.

Also, excluded from the DET tax credit, are:

• assets that are depreciable over a period of less than three years,
• automotive 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 DET tax credit requires obtaining

(i)  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

(ii)  an annual certificate issued by the Minister of Economy proving the reality of the project and investment/operating expenses. Such certificate should be attached to the corporate tax return filed with the Luxembourg tax authorities every year.

Projects where cumulative investment/operating expenses over the three consecutive fiscal years of the realisation of the project would remain below EUR 20,000 (excluding VAT) will not be considered in obtaining the eligibility certificate.

3. Increase from 8% to 12% of the rate applicable to the tax credit for overall investment

The existing TCOI remains in place but with (i) an increased rate reaching now 12% and (ii) a repeal of the EUR 150,000 threshold.

As a reminder, the TCOI 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,
• acquisitions of software, insofar as they have not been acquired from a related company (to the extent not otherwise qualifying under the DET tax credit already).

We note that for investments in fixed assets qualifying for special depreciation, the applicable rate is increased to 14%.

The TCOI 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 DET tax credit, income derived from the software would be out of scope of the patent box regime foreseen under article 50ter LITL.

4. General provision

The total of the DET tax credit and TCOI would be creditable on the corporate income tax due for the fiscal years during which the investment or operating costs are realised and can be carried forward (except TCOI on software) during 10 subsequent fiscal years if it would not be fully used.