Luxembourg

Foreign tax credit

See Foreign income in the Income determination section for a description of the foreign tax credit regime.

Inbound and capital investment incentives

Luxembourg tax law provides for various incentives, with specific requirements, in the areas of risk capital, audio-visual activities, environmental protection, research and development (R&D), professional training, and recruitment of unemployed persons.

The most commonly used incentives are the investment tax credits, which are further described below.

Intellectual property (IP) regime

The law enacting the new IP regime (article 50ter of the LITL) was approved by the Luxembourg Parliament on 22 March 2018. The new IP measures entered into force as of 1 January 2018.

Under this regime, eligible net income from qualifying IP assets benefits from an 80% exemption from income taxes. Consequently, a corporate taxpayer based in Luxembourg City with eligible net income will be taxed on such income at an overall (i.e. corporate income taxes plus municipal business tax) effective tax rate of 4.988% in the 2023 tax year. IP assets qualifying for the new regime also benefit from a full exemption from Luxembourg’s NWT.

The levels of these exemptions are consistent with those given under the previous regime (article 50bis of the LITL repealed effective on 1 July 2016 for CIT and municipal business tax purposes and 1 January 2017 for NWT purposes). However, the scope of the new regime, and the way in which income that is to benefit from the exemption is to be computed, are both markedly different. The ‘nexus approach’ focuses on establishing a direct connection between expenditures, the IP assets, and the income that can benefit from the beneficial regime.

In applying the new regime, each IP asset must be looked at separately, and income and expenditure linked to each asset thus needs to be identified. The only exception to this approach is when a closely linked family of products or services are involved, and it would be so complex as to make it impossible to adopt an asset-by-asset approach.

Two main groups of IP assets are eligible to benefit from the new regime:

• Inventions protected under patents, utility models, and other IP rights that are functionally equivalent to patents. More specifically, these comprise supplementary protection certificates for patents on pharmaceutical or phyto-pharmaceutical products, extensions to supplementary protection certificates to paediatric medicines, plant variety certificates, and orphan drug designations.
• Software protected by copyright under national or international norms.

Market-related IP, such as a trademark, is not eligible.

R&D incentives

Luxembourg entities involved in innovative and R&D activities can benefit from financial support in addition to the specific IP tax regime and general tax incentives.

Innovation loans may be granted by the Société Nationale de Crédit et d’Investissement and may carry a fixed interest rate lower than the market rate. Financial support may also be granted in the form of cash grants or interest subsidies.

R&D projects or programmes receive financial support up to a maximum eligibility (percentage of costs eligible for the incentives) depending on the size of the beneficiary (private research companies or organisations) as follows:

• Large (25% to 100% depending on the investment).
• Mid-size (35% to 100%).
• Small (45% to 100%).

These incentives are available for:

• experimental development
• experimental development and cooperation
• industrial research
• industrial research and cooperation, or
• fundamental research.

Innovation in process and organisation and investment in innovation pools can benefit from financial support of between 15% and 35% (50% for public research companies).

Promotion and development of innovation pools can benefit from financial support of up to 50% for private organisations or 75% for public research companies.

Research regarding technical feasibility can benefit from financial support of up to 40% or 50% if prior to experimental development and up to 65% or 75% if prior to experimental research.

Tax credit for investments

Luxembourg offers different investment tax credits, under the following conditions:

• Investment is by an enterprise seeking commercial profit.
• Investment is managed by an establishment situated in Luxembourg with the intention of remaining permanently.
• Investments have to be physically used in the territory of Luxembourg or of a country that is a member of the European Economic Area.
• Durability criteria (exclusion of building sites).
• Requires application by the taxpayer (form 800, filed as an appendix to the income tax return).

Tax credit for additional investment (TCAI)

The new Luxembourg investment tax credits regime to accelerate sustainability transformation introduced by the bill n°8276 dated 19 December 2023 ('the Law') fully repeals the tax credit for additional investment with effect as from the 2024 tax year (i.e. for financial years closing on or after 1 January 2024).

Tax credit for investments and operating expenses connected with digital and ecological transformation ('DET tax credit')

The Law introduces an 18% tax credit that applies to certain investments and operating expenses connected with digital and ecological transformation, provided they comply with at least one of the objectives on the digital transformation or on the ecological/energetic transformation as listed in the Law.

For investments in tangible depreciable assets, the DET tax credit is limited to 6% considering that these assets are expected to benefit from the 12% tax credit for global investment (further described below), hence reaching the expected 18% tax credit overall. 

Income derived from investment and expenses related to the acquisition or development of software/patents would not be eligible to the patent box regime provided by article 50ter of the LITL to the extent the company benefits from a DET tax credit on these investments and expenses.

Also, excluded from the DET tax credit, are:

• assets that are depreciable over a period of less than three years
• automotive vehicles, and
• investments and operating expenses to bring the company into compliance with obligations arising from environmental protection legislation and other legal and regulatory provisions applicable to the establishment and operation of industrial and commercial companies.

The benefit of the DET tax credit requires obtaining:

• an eligible certificate issued by the Minister of Economy attesting the eligibility of the investment and operating expenses in relation to a project of digital/ecological transformation as defined under the new article 152bis LITL, and
• an annual certificate issued by the Minister of Economy proving the reality of the project and investment and operating expenses. Such certificate should be attached to the corporate tax return filed with the Luxembourg tax authorities every year. Following the request of the State Council, the Law now explicitly provides that this certificate is binding to the tax authorities.

Tax credit for overall investment (TCOI)

The tax credit for overall investment is based on the acquisition price or production costs of new qualifying assets (basically tangible depreciable assets) acquired during a given accounting period. The Law increases the rate to 12% and repeals the EUR 150,000 threshold as from the 2024 tax year.

The TCOI applies to:

• investments in depreciable tangible assets other than buildings, livestock, and mineral and fossil deposits
• investments in sanitary and central heating installations incorporated into hotel buildings (under certain conditions)
• investments in certain buildings qualifying as social investment
• investments in fixed assets qualifying for special depreciation, and
• acquisitions of software, insofar as they have not been acquired from a related company (to the extent not otherwise qualifying under the DET tax credit already).

For investments in fixed assets qualifying for special depreciation, the Law increases the applicable rate to 14%.

The Law caps the TCOI related to the acquisition of software at 10% of the CIT due for the fiscal year during which the financial year closed and where the acquisition of the software was made. Similar as for the DET tax credit, income derived from the software would be out of scope of the patent box regime foreseen under article 50ter of the 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 IP regime (see Intellectual property (IP) regime above).

The total of the DET tax credit and TCOI are creditable on the CIT due for the fiscal years during which the investment or operating costs are realised and can be carried forward (except for the TCOI on software) during ten subsequent fiscal years if it would not be fully used.

In addition, in order to offer a further incentive for sustainable mobility, some specific types of cars are eligible assets to the TCOI up to the first EUR 50,000 threshold of the acquisition price per car. 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.

Other incentives by entity

Investment funds

Investment funds resident in Luxembourg generally are exempt from CIT, municipal business tax, and WHT on dividends. These investment funds are subject to the subscription tax and to the general registration duty regime.

Private wealth management company (Société de gestion du Patrimoine Familial or SPF)

The SPF has been tailored to enter into the private sphere of individuals for the purpose of wealth management. Its corporate objective is restricted to the acquisition, holding, management, and disposal of financial assets, to the exclusion of any commercial activity. As a general rule, an SPF is exempt from Luxembourg taxation on income and NWT in Luxembourg. A yearly subscription tax of 0.25% is due on the basis of paid-up capital, share premium, and excessive debts. Subscription tax, however, is capped at EUR 125,000. No WHT applies on dividends distributed by an SPF. Non-resident investors are not taxed in Luxembourg on dividends paid by an SPF or on capital gains realised on shares in an SPF.

Securitisation companies (SCs)

An SC is a company that carries out securitisation activities or participates in securitisation transactions. SCs are subject to normal corporate taxation based on their net accounting profit (i.e. gross accounting profits minus expenses). However, the commitment to remunerate the holders of securities (both capital and debt) issued by the SC qualifies as interest on debt even if paid as return on equity. SCs are not subject to NWT in Luxembourg.

Venture capital vehicle (Société d’Investissement en Capital à Risques or SICAR)

The SICAR is an entity mainly used for private equity investments. Incorporated under a corporate form, the SICAR is subject to income tax at the normal rate with the benefit of an exemption on income and gains (e.g. dividends, capital gains, liquidation proceeds, interest) from transferable securities qualifying as investments in risk capital, as well as income arising from investments in liquid assets pending their investment in risk capital for a maximum of 12 months. In addition, it can benefit from the European directives and DTTs. SICARs are exempt from NWT. Under the form of a limited partnership, the SICAR is treated as a tax transparent entity, and investors are taxed according to the rules of their country of residence. SICARs treated as tax transparent entities do not benefit from the European directives and DTTs. The SICAR mainly targets qualified or informed investors (i.e. ‘professional’ investors).

Financial services companies

Banks, securities depositaries, insurance and reinsurance companies, as well as other financial service companies, may benefit from specific regulations when establishing their taxable basis for CIT (e.g. provision for the neutralisation of unrealised exchange gains, general banking risk provision, provision for guarantee of deposits, mathematical reserves, and/or catastrophe reserves).

Shipping companies

Luxembourg-resident shipping companies are not subject to municipal business tax and can benefit from investment tax credits and accelerated depreciation (even for used assets).

Farming businesses

Farming businesses may deduct 30% of the amount of any new investment of up to a total of EUR 250,000 made in the business. Investment above this amount is eligible for a deduction of 20% of the difference between the investment amount and the aforementioned EUR 250,000 limit.