Luxembourg's enhanced investment tax credit: Driving digital transformation for PSFs

Luxembourg's revamped investment tax credit regime: Key features and changes

At its heart, the ITC allows companies to claim a credit of 18%  of “eligible” investments and operating expenses linked to digital transformation. Unlike a simple deduction that reduces the taxable basis, the ITC directly lowers the amount of tax  due, creating an immediate financial incentive. Thanks to a carry-forward mechanism of up to ten years, it also provides flexibility for companies with fluctuating profits or long-term investment cycles. This structure makes the incentive particularly attractive for PSFs, who often pursue complex and multi-year digital projects.

Digital transformation in Luxembourg is broadly defined. It covers among others the deployment of artificial intelligence, machine learning, big data analytics, cloud solutions, and automation tools, as well as strengthening cybersecurity systems and modernizing IT infrastructure but being beyond a compliance with legal or regulatory requirements. For PSFs, these investments translate into more efficient compliance processes, safer and more reliable data platforms, enhanced risk management, and client-centric experiences. The authorities explicitly recognize that transformation lies not only in technology but also in the way organizations operate and deliver services.

Eligibility rules are clear, but attention to detail is crucial. The law requires that investments are made, and operating expenses incurred, in an establishment located in Luxembourg that is intended to remain there on a permanent basis. Projects must also be physically implemented either on the territory of the Grand Duchy of Luxembourg or within another State that is party to the Agreement on the European Economic Area. While these conditions are particularly relevant both for digital transformation projects and for ecological and energy transition projects, they underline Luxembourg’s intention that the credit drives transformation anchored in the domestic and EEA economies.

The process of claiming the ITC involves two key steps:

First, businesses must apply for and obtain an attestation of eligibility from the Ministry of the Economy, submitted through the secure MyGuichet.lu platform (currently available only in French, and a decision is provided within three months maximum of submission).

Secondly, once the project has incurred investments and expenses within a given operating year, companies then apply for a compliance certificate, supported by documentation of the eligible costs. This certificate, issued by the Ministry, must be submitted to the Luxembourg tax authorities with the corporate tax return to activate the credit. Deadlines are strict: the application for the certificate must be submitted within two months of the close of the operating year, and the certificate will be delivered within nine months. Only expenditures incurred after the submission of the eligibility request can be included.

However, digital transformation projects that began before a request for an eligibility attestation can still qualify for the tax credit. Only the investments and operating expenses made after the introduction of the eligibility request may be included in the compliance certificate and therefore benefit from the regime. In practice, this means that while projects already underway are not excluded, companies must ensure they formally apply as soon as possible in order to capture eligible expenditures.

Eligible costs under the ITC are wide-ranging and reflect the nature of modern financial sector investments. Expenditures on IT hardware, software development, patents and licenses are covered, as are consultancy costs and the fees of technical service providers directly involved in the project. Staff costs and tailored training programs linked to digital transformation could  also be included, provided they are directly tied to the transformation effort.

It is critical that businesses carefully distinguish between capital expenditures, such as infrastructure, and operating expenditures, such as external consulting or training. The identification of these categories in the application is particularly important because the amounts declared in the attestation process form the ceiling for the tax credit claim.

This makes the explanation of the project in the application form a decisive step: companies should demonstrate the holistic impact of the transformation and ensure all eligible expenditures are accounted for upfront.

First-hand experience: Investment tax credit application results

Results from 2024 already demonstrate the regime’s impact. In total, 68 companies successfully claimed the credit, with 56 projects addressing digital transformation priorities, and many centered on artificial intelligence and data-driven innovation. The regime supported EUR 246 million in transformation investments, resulting in EUR 44.3 million in tax credits granted. Of the 87 applications submitted, 72 were approved and only  rejected, reflecting both the efficiency of the authorities and the strong preparedness of applicants.

Market feedback underscores its success. Businesses not only welcome the fiscal relief but also describe the ITC as a catalyst that makes large-scale digital initiatives more feasible. Administrative clarity and transparency have been praised, thanks to the detailed FAQ issued by the tax authorities. With a review planned for 2026, the regime is expected to evolve further, but early results indicate that its core principles are here to stay.

For PSFs operating in an environment of heightened client expectations, stricter regulation, and increasingly digital markets, the ITC is both an incentive and a strategic enabler. It allows institutions to modernize more confidently, scale critical investments, and contribute to Luxembourg’s position as a European leader in financial innovation.

Digital transformation has shifted from a long-term aspiration to an immediate necessity. The ITC provides the financial support to make it happen. Companies that seize the opportunity today will not only strengthen their competitive edge but also future-proof their operating models in a rapidly evolving global financial landscape.

A final question remains regarding the compatibility of the ITC regime with the OECD Pillar 2 rules. Concerns have already been voiced by market participants, as the ITC in its current form is not considered a "qualifying tax credit" under existing Pillar 2 rules. This means that while the ITC reduces Luxembourg corporate income tax, it also lowers the effective tax rate calculated under Pillar 2, potentially triggering top-up tax payments under Pillar 2.

Recognizing that tax incentives are a widely used policy tool to promote investment and economic development, the OECD Inclusive Framework adopted a new permanent substance-based tax incentive (SBTI) safe harbor as part of the side-by-side package released on 5 January 2026. This sage harbor allows multinational groups to treat certain qualified tax incentives that are closely linked to real economic substance as additions to covered taxes, up to a defined substance-based cap. Thus, Luxembourg’s ITC for digital transformation could, in principle, qualify under Pillar Two rules, provided the relevant conditions are met, including demonstrating substantive economic impact and ensuring no adverse effect on effective tax rate calculations within the applicable substance limits.