New tax law for 2018
Reduction of the corporate income tax (CIT) rate
The CIT rate for companies having a net taxable base of more than 30,000 euros (EUR) is reduced to 18% for 2018, leading to an overall tax rate of 26.01% in Luxembourg City for fiscal year (FY) 2018 (taking into account the solidarity surtax of 7% on the CIT rate, and including the 6.75% municipal business tax rate applicable).
Also, the CIT rate for small and start-up companies (i.e. companies having taxable income below EUR 25,000) has been reduced to 15%, leading to an overall tax rate of 22.08% in Luxembourg City (taking into account the solidarity surtax of 7% on the CIT rate, and including the 6.75% municipal business tax rate applicable). For companies with a tax base of between EUR 25,000 and EUR 30,001, the CIT would be EUR 3,750 plus 33% of the tax base above EUR 25,000.
New intellectual property (IP) regime
The new measures related to a new IP regime proposed in Bill No. 7163 in August 2017 have been approved by the Luxembourg Parliament on 22 March 2018. This new IP regime, applicable since 1 January 2018, provides for an 80% tax exemption on eligible net income for qualifying IP rights. The new regime is fully consistent with all recommendations made by the Organisation for Economic Co-operation and Development’s (OECD's) Forum on Harmful Tax Practices, including those set out in the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project Action 5 Final Report published in October 2015. The new regime thus adopts the 'nexus approach', to ensure that only activities with enough substance can qualify for beneficial treatment. This approach is also in line with positions taken by the European Union's (EU's) Code of Conduct Group on business taxation, which monitors IP regimes operating in EU member states.
The new regime also seeks to promote research and development (R&D) activity in Luxembourg.
Tax credit for investments
The scope of the regime offering tax credits for investment is extended to include the acquisition of software, provided that this software has not been acquired from any associated entity (as defined under article 56 of Luxembourg Income Tax Law [LITL]).
The above measure only relates to the acquisition of software and does not include software created by the taxpayer itself. The revenues from such software can instead potentially benefit from partial tax exemption under Luxembourg’s new IP regime, applicable since 1 January 2018. Conversely, a taxpayer claiming tax credits for investment for the acquisition of software cannot also benefit from the 2018 IP regime on any revenue derived from such software (so as to prevent any double tax advantage arising).
Under this new measure, a separate tax credit is given for investment in software, although the amount that can be claimed partly mirrors the rules for calculating the existing wider overall tax credit for investment; the tax credit for software is set as 8% of the cost of investment up to EUR 150,000 in a tax period and 2% for any investment exceeding EUR 150,000. However, one further restriction applies; the credit may not exceed 10% of the tax due for the tax year during which the acquisition of software occurs. There are no measures that allow any credits that are not available because of this restriction to be deferred to a subsequent period; such potential credits are permanently lost.
In addition, in order to offer a further incentive for sustainable mobility, some specific types of cars will become eligible assets for all components of the tax credits for the investment regime. To be eligible, the vehicles must be:
- passenger cars
- 'zero emissions', running exclusively on electricity or hydrogen cells
- classified as M1, having a passenger compartment designed exclusively for the carriage of passengers and having not more than nine seats (including the driver’s seat), and
- first registered after 31 December 2017.