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. Luxembourg tax law provides for two types of investment tax credits.
First, a tax credit is available that amounts to 13% of the increase in investments in tangible depreciable assets made during the tax year. The increase in investment over a given tax year is computed as the difference between the current value of all qualifying assets and the reference value allocated to the same type of assets.
Independently, the company may benefit from a 8% tax credit on the first EUR 150,000 of qualifying new investments and a 2% tax credit on the amount of new investments exceeding EUR 150,000 in tangible depreciable assets as well as investments in sanitary and central heating installation in hotel buildings and investments in buildings used for social activities. The above 8% and 2% rates are increased to 9% and 4% for investments eligible for special depreciation (i.e. investments favouring the protection of the environment, the realisation of energy savings, or the creation of employment for handicapped workers). However, certain investments are excluded from the credit calculation, including investments in real property, intangible assets, and vehicles (unless specifically allowed by the law).
Domestic law requires that investments be physically operated in Luxembourg or in the European Economic Area in order to be eligible for the incentive, unless the investment consists of shipping vessels operating in international waters. In addition, the tax benefit of the tax credit is limited to investments that are made within a Luxembourg business establishment and that are intended to be used permanently in Luxembourg.
Further to the Court of Justice of the European Union (CJEU) decision dated 22 December 2010 (Tankredeerei, C-287/10), the Luxembourg tax authorities issued a Circular letter confirming that the investment tax credit must be granted to any investment used within the EU and EEA member states.
Intellectual property (IP) regime
The law enacting the new IP regime was approved by the Luxembourg Parliament on 22 March 2018. The new IP measures entered into force as of 1 January 2018.
Under the new 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 5.202% in the 2018 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. 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.
The prior Luxembourg IP regime (Article 50 bis of the LITL) allowed a tax exemption on 80% of the net income and capital gains derived or deemed to be derived from a wide variety of IP. The regime began to phase out on 1 July 2016, in line with the recommendations of the EU’s Code of Conduct for Business Taxation Group and the OECD/G20 BEPS Project Final Report on Countering Harmful Tax Practices.
The prior IP regime was repealed effective 1 July 2016 for CIT and municipal business tax purposes and 1 January 2017 for NWT purposes.
Taxpayers owning IP assets that currently benefit from the prior IP regime will continue benefitting during the transitional period through 30 June 2021.
IP assets acquired after 1 January 2016 also may benefit from the prior IP regime through 30 June 2021, provided that:
- they were developed or acquired from unrelated parties before 1 July 2016, or
- they were acquired from a related party before 1 July 2016 (including through a tax-neutral transaction) and were already eligible for the prior IP regime or benefited from a foreign country’s IP regime that was similar to the prior IP regime in Luxembourg before the acquisition.
IP assets acquired from any related party between 31 December 2015 and 30 June 2016 that did not benefit from an IP regime before being acquired will only be eligible for the prior IP regime through 31 December 2016.
IP assets acquired or developed after 30 June 2016 cannot benefit from the prior IP regime. Those assets and related income and expenses will be subject to the standard tax regime and rates or may benefit from a future IP regime that could be based on the ‘nexus approach' prescribed by the EU Code of Conduct Group and the OECD to counter harmful tax practices.
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
The tax credit for additional investment is computed as 13% (2018 rate) of [the net book value of qualifying investment assets at the end of the current accounting period, minus the arithmetic average of the net book values of these assets at the end of the five prior accounting periods (minimum of EUR 1,850), plus depreciation accounted for on assets acquired or constituted during the current accounting period].
Tax credit for overall investment
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 rate for 2018 is 8% for the first tranche not exceeding EUR 150,000 and 2% for the tranche exceeding EUR 150,000.
As from 1January 2018, the scope of the regime offering tax credits for investment has been 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 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.
Other incentives by entity
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.
Financial participation company (Soparfi)
A Soparfi (Société de Participation Financière) is neither a specific type of company nor a special tax regime. It is, rather, a name used to refer to resident companies that hold and manage the shareholdings of subsidiaries. As any Luxembourg resident company, a Soparfi is subject to CIT, municipal business tax, and NWT; it benefits from Luxembourg’s DTTs, EU Directives (e.g. Parent Subsidiary Directive), the domestic participation exemption on dividends received, and capital gains on qualifying participations.
Private wealth management company (Société de gestion du Patrimoine Familial or SPF)
The SPF has been tailored to enter 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).
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 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.