Draft legislation to modernize current investment tax credit published

The Luxembourg government presented to parliament a draft law on 13 July 2023 that proposes an in-depth modernization of the current investment tax credit. This reform is part of a package of measures (Solidaritéitspak 2.0) agreed upon during a September 2022 tripartite meeting among the government and the social partners to support the competitiveness of Luxembourg companies. It targets mining, craft, commercial, and industrial businesses. The parliament will now review, potentially modify, and vote on the draft law.

Currently, the investment tax credit has two components:

• The tax credit for overall investments:
  • 8% for the first EUR 150,000 of investment; and
  • 2% for investments above EUR 150,000; and
• The tax credit for additional investments: 13%.

The tax credit only applies to investments in assets and does not cover any operational expenses incurred by taxpayers.

The modifications to the investment tax credit proposed by the draft law, presumably effective as from the 2024 financial year, would be as follows:

• The tax credit for additional investments would be extinguished and replaced by a tax credit based on investments and operational expenses incurred for the digital transformation or the ecological and energy transition of eligible taxpayers.
• The tax credit for overall investments would be increased from 8% to 12% (without the EUR 150,000 threshold) for investments made during the relevant financial year. This rate would be increased to 18 % for investments and operational expenses incurred for the digital transformation or the ecological and energy transition of eligible taxpayers.
• The tax credit for investments linked to digital transformation or ecological and energy transition would be subject to the following procedure:
  • First, the Ministries of Finance, Economy, Environment, and Energy would jointly attest the eligibility of the investment and operational expenses related to the digital transformation or the ecological and energy transition, further to receiving advice from a specific commission. However, only projects with planned investments and operational expenses exceeding EUR 20,000 without VAT over three years would be considered for eligibility;
  • Second, the Ministry of the Economy would issue a certificate confirming the authenticity of the investment and operational expenses and their conformity to the objectives of the digital transformation or the ecological and energy transition. The taxpayer would submit a request within the two months following the close of the financial year during which the investment and operational expenses were incurred. After the verification by the Ministry of the Economy, the certificate would be issued within nine months following the close of the financial year.
• Digital transformation would be defined as the achievement of an innovative process or an organizational innovation through the implementation and use of digital technologies. It would have to meet at least one of the following goals:
  • redefine a production process from end to end to substantially improve productivity, energy efficiency, or materials efficiency;
  • Introduce an innovative economic model (including circular economy);
  • Entirely redefine the provision of services to create new value for the company’s stakeholders;
  • Significantly transform the organization of the company to create new value for its stakeholders; and
  • Significantly redefine all the company’s processes to substantially increase the identification and the mitigation of the digital risks in the company’s activities.
• Ecological and energy transition would be defined as any change reducing the environmental impact from the production or consumption of energy or the use resources. It would have to be a significant technical or equipment change and should aim to:
  • Significantly improve the energy efficiency of a production process and realize at least 20% energy savings;
  • Significantly decarbonize a production process to reduce Co2 emissions by at least 40%;
  • Produce or store the energy produced from non-fossil renewable sources;
  • Reduce the air pollution at production sites;
  • Significantly increase the material efficiency of a production process to reduce the use of primary raw materials by at least 15% or to replace primary raw materials with at least 20% subproducts or secondary raw materials; or
  • Implement a production process allowing longer use of products through reuse.
• The scope of eligible investments and operational expenses would be broad and include:
  • Investments in depreciable assets with a depreciable life longer than three years;
  • Investments in software or patents other than those acquired from an associated enterprise;
  • Expenses incurred for the use of patents and software granted by a non-associated enterprise;
  • Expenditure on advisory, diagnostic, and technical support services provided by external providers that are not related to operating expenses in the normal course of the company’s business, such as regular tax or legal advice, or advertising;
  • Personnel costs directly allocated to digital transformation or the company’s ecological and energy transition; and
  • Training expenditure for staff directly involved in digital transformation or the company’s ecological and energy transition.

The draft law is encouraging for the Luxembourg economy. It demonstrates a clear interest in supporting Luxembourg businesses’ digital transformation and ecological and energy transition. Businesses in Luxembourg should follow future developments closely to make well-informed operational decisions regarding their investments and operational expenses for 2024.

The Deloitte Global Innovation and Investment Incentives Service Team, composed of engineers, decarbonization experts, and tax specialists, remains available to assist you in determining your eligibility for the above incentive scheme.

If you have any questions or want to explore how Deloitte Luxembourg can help you regarding this topic, please get in touch with Thierry Bovier or Bernard David.