Background and summary
ITC is a type of a tax credit available to Luxembourg taxpayers making qualifying investments. It can be deducted from the corporate income tax (“CIT”) due for a given year, and carried forward over a period of ten years, if unused.
The current ITC regime is regulated by article 152bis of the Luxembourg income tax law (“LITL”) and consists of a global ITC and an additional ITC. The global ITC on qualifying new investments currently amounts to 8% for the tranche up to EUR 150,000 and 2% for the tranche exceeding EUR 150,000. The additional ITC of 13% is determined by comparing the adjusted net book value of qualifying assets to their average net book value during the last five years.
Under the Draft Law, the global ITC rate is proposed to be increased from 8% to 12% and the additional ITC is planned to be abolished. Moreover, the New ITC for investments and expenses related to digital transformation or ecological and energy transition will be introduced. For this purpose, the Draft Law proposes a procedure for obtaining a certificate attesting to the reality of the investments and operating expenses eligible for the New ITC.
1. Amendment to the global ITC
The Draft Law proposes to remove the current investment threshold of EUR 150,000 and increase the ITC from 8% to 12%. Moreover, tax credit for investments in fixed assets eligible for special depreciation (article 32bis of the LITL), is planned to be increased from 9% to 14%.
2. Introduction of the New ITC
The New ITC
The current additional ITC is envisaged to be abolished and the New ITC introduced, supporting the investments/expenses made in the context of digital transformation or ecological and energy transition of a business.
The Draft Law defines digital transformation as a realization of a process innovation or an organizational innovation through the implementation and use of digital technologies. Ecological and energy transition is defined as any change that reduces the environmental impact in the production or consumption of energy or use of resources, the change being significant and of a technical or material nature.
The tax credit for qualifying investments/expenses should amount to 18% of investments and expenses, with the exception of investments in tangible depreciable assets, for which the New ITC should amount to 6%.
Among the qualifying investments/expenses are investments in depreciable tangible assets (except for buildings, livestock and mineral and fossil deposits), investments in software and patents (except those acquired from a related party), staff expenses directly related to digital transformation or environmental and energy transition, etc.
Moreover, in order to qualify for the New ITC, the investments/expenses should meet certain objectives. In case of digital transformation, the Draft Law enumerates objectives such as:
- redefining the company's entire production process in such a way as to substantially improve productivity, energy efficiency or material efficiency;
- significant redefining of the entirety of services rendered by the company in such a way as to create new value for the stakeholders of the company;
- significant redefining of all of the company's processes in order to substantially increase the identification and mitigation of digital risks of company activities; etc.
In the context of ecological and energy transition, some of the listed objectives are:
- significant decarbonizing of a company's production process to reduce greenhouse gas emissions by at least 40 percent;
- implementation of a production process that extends the use of products through reuse; etc.
In order to benefit from the New ITC, the taxpayer should first obtain an attestation regarding the eligibility of the investments/expenses issued jointly by the Ministers of Finance, Economy, Environment and Energy.
The taxpayer should apply for the New ITC yearly in its tax return. Together with the tax return, a certificate issued by the Ministry of the Economy should be filed, confirming the reality of the investments/expenses made during the year. Such certificate should be requested by the taxpayer at the latest two months following the end of the financial year in question.
3. Our observations
The proposed amendments to the ITC regime are welcome news given the objective of the New ITC to accelerate the digital transformation and the ecological and energy transition of Luxembourg businesses.
With the Draft Law still following the legislative process, it may encounter some changes before being voted by the Luxembourg Parliament.
Should you require any assistance in assessing the available ITC or preparing the tax return, do not hesitate to reach out to the Tax team at Grant Thornton Luxembourg.