Luxembourg Tax alert 2023-10

On 13 July 2023, a new bill was submitted to the Parliament which would substantially modify the investment tax credit for companies. This bill, which is part of the tripartite agreement (“Solidaritéitspak 2.0.”)  between the government, the Luxembourg Employers’ Association and the trade unions, intends to provide the necessary changes to promote investments into digital transformation, as well as ecological and energy transition. 

Companies in Luxembourg can currently benefit from two types of investment tax credits:

•  A tax credit for “global investment” on specified property equal to 8% of the total acquisition price of the qualifying assets until the first €150,000 and 2% for the portion exceeding €150,000. Please note that tax credit rates are increased to 9% and 4% for certain types of investments in ecological equipment.
• A tax credit for “additional investment” in certain tangible property equal to 13% of the additional investment in a given year.

The investment tax credit reduces the final corporate income tax due and can be carried forward for 10 years.

According to the bill, the current regime would be amended as follows:

1) Introduction of a new investment tax credit for investments in digital transformation, and ecological and energy transition (“New ITC”)

One of the key changes in the bill is that the investment tax credit for “additional investment” would be repealed and replaced by a new tax credit for investments in digital transformation, and ecological and energy transition within businesses. The new ITC would not be calculated only on the acquisition cost of assets, but also on any qualifying deductible operating expenses.

The bill provides precise definitions on what kind of investments would fall within the new scope. The investment must first meet the conditions of digital transformation or ecological and energy transition:

• Digital transformation includes the realization of a process innovation or an organizational innovation in a business through the implementation and use of digital technologies. 
• Ecological and energy transition includes any significant changes that reduce the environmental impact in the production, consumption of energy or use of resources.

If the investment falls within the definition, then such investment would be eligible to the extent it meets certain additional conditions with respect to:

• the type of asset: this mainly includes depreciable tangible assets (other than motorized vehicles and buildings) which can be amortized over at least 3 years, patents or softwares not acquired from a related company;
• the type of expense: this includes, among others, external consultant fees, employee costs, training costs that are directly related to implementation of the project; and
• the objective to be reached:
  • For digital transformation: for example, the implementation of a new production process aiming to substantially improve productivity or the energy efficiency.
  •  For energy transition: for example, the production and storage of energy from renewable non-fossil sources in order to ensure the energy needs of the company through self-consumption.

The bill moreover introduces a new attestation and certification system:

• As part of the attestation system, the taxpayer needs to file an application of eligibility with the Ministry of the Economy. Such request shall contain, amongst other, detailed information including the name and description of the project, the location of the project, the objective and a description justifying how the project may achieve its goals and the start and end dates of the project. The Ministry of the Economy will carefully review the information with an advisory committee before issuing the attestation.
• Subsequently, an annual certificate on the reality of the costs and their compliance with the rules will be granted, which should be attached to the tax return. The annual certificate must be requested two months following the end of the year for which the New ITC is claimed. The Ministry of Economy will issue the certificate within nine months the end of the year for which it was requested. The certificate will only cover investments and operating expenses made after the filing of the request for the attestation.

A Grand-Ducal Regulation should provide more information on this process.

The rate of the investment tax credit for investments in digital transformation, and ecological and energy transition confirmed by the new attestation and certification process will be 18% of the investments costs and operating expenses. However, for tangible depreciable assets, the rate will be 6%. This can be explained by the fact that these assets would also be eligible for the tax credit for global investment, which will be 12%, therefore bringing the overall rate also to 18%. Income from patents and software benefitting from this New ITC cannot benefit from the IP box regime under Article 50ter LITL.

2) Amended tax credit for “global investment”

The current tax credit for global investment remains in place and is subject to certain modifications. Most importantly, the bill introduces a single tax rate, by increasing the rate from 8% to 12% and by repealing the €150,000 bracket.

The scope of the assets included remains basically unchanged, with the sole change being the exclusion of software acquisitions falling with the scope of the New ITC from the scope of the tax credit for global investment. Any other software not acquired from a related enterprise remains eligible.

As a consequence, acquisition costs or investments costs that are done during a fiscal year on qualifying assets would be subject to a tax credit of 12%, with the exception of certain types of investments in ecological equipment subject to a rate of 14%. For software, the tax credit cannot exceed 10% of the corporate tax due for the related tax year and such tax credit cannot be combined with the benefit of the IP box regime under article 50ter.

3) Carry forward

In case of insufficient corporate tax charge, the investment tax credit (except for the part attributable to software under the tax credit for global investment) may still be carried forward for up to 10 years following the financial year during which the investments have been made. 

The bill will now go through the usual legislative process and may still be subject to further amendments. Due to the upcoming summer recess of the Parliament and the parliamentary elections in October, it remains unclear when the bill will pass.

Once voted, the new tax credit will enter into force as from tax year 2024.

Although it is not explicitly mentioned by the bill, it is currently not expected that the investment tax credit would qualify as a “Qualified Refundable Tax Credit” for Pillar 2 purposes. As a consequence, companies benefitting from the investment tax credit and covered by the scope of Pillar 2 could see a negative impact on the effective tax rate under the above-mentioned rules. This is due to the fact that the investment tax credit would be treated differently for Pillar 2 purposes than for Luxembourg domestic tax purposes. A more detailed analysis should, however, be performed once the Luxembourg transposition law is available.

Please refer to this newsletter for more detail on Pillar 2 and the implications for Luxembourg.

KPMG Tax professionals remain at your disposal to answer any questions.