“In recent years the economic context, marked by high inflation, has weighed heavily on the performance of companies, whatever the sector in which they operate and whatever their size. What’s more, faced with American and Asian players, European structures need to strengthen their competitiveness. To achieve this, the key lies in increasing the digitisation of organisations and processes. It is essential for Luxembourg players to accelerate their digital transformation,” comments Patrice Witz, Partner and Digital Leader at PwC Luxembourg.

An 18% tax credit on investments and expenditure

The Luxembourg government has made it a priority to boost the competitiveness of companies that make up its economy. As such, one of the key measures to support players in this area is the modification of an old tax regime that favours investment in digital transformation. “The government wanted to give players more incentive to invest in this area by granting an 18% tax credit on all investments (Capex) and operating expenses (Opex) linked to a digital transformation project,” explains Nenad Ilic, Partner, Financial Services Tax Leader at PwC Luxembourg. “With the implementation of this new regime, the scope of eligible investments and expenditure has also been broadened. These may include the acquisition of hardware, software or the costs of staff assigned to the project, as well as training or consultancy costs.”

Supporting innovation, improving performance

The government wanted to introduce a substantial incentive for digital transformation. What’s more, the intention has been to make it easier for all organisations, whatever their sector or size, to access the tax credit, since it is no longer subject to a minimum investment and there is no ceiling on the investments made. “To be eligible, however, applicants will have to demonstrate how the investments made contribute to strengthening their competitiveness or improving customer service. Projects that are limited to replacing existing technology, carrying out a simple technical update or complying with regulatory requirements will not be eligible for this incentive,” says Patrice Witz. “The challenge is to support players who want to innovate, achieve efficiency gains, capture new revenues or reduce their exposure to cyber risks.”

How to benefit from this tax incentive

To benefit from this tax incentive, companies must apply to the Ministry of the Economy. The procedure involves two stages. Each organisation must first obtain an eligibility attestation for its project, preferably at the beginning or even before the project is launched,” explains Nenad Ilic. “When applying, the company must describe what the project consists of, demonstrate how it meets the criteria laid down by the law and share a projected budget over a maximum period of three years.”

Based on this application, the Ministry can decide whether the project is eligible. It is important to note that applications can be submitted for projects that have already begun. However, only expenditures and investments made after the application for eligibility has been submitted will qualify for the tax credit. “Secondly, provided the project is eligible, the company must apply for a compliance certificate, reporting to the Ministry on the status of the project and the related expenditure, with supporting invoices. The compliance certificate must then be attached to the tax return,” continues Nenad Ilic.

A unique system in Europe

According to the two PwC Luxembourg partners, this tax regime, although little known, is attracting real interest from market players. There’s a real challenge in bringing the existence of this tax incentive for digital transformation to the attention of as many people as possible,” says Patrice Witz. “It could help to strengthen Luxembourg’s position by attracting new capacity while at the same time strengthening digital skills in Luxembourg. It has paved the way for genuine reflection on the desirability of stepping up digital transformation initiatives from Luxembourg, including at the level of major international groups. And, of course, it is helping to improve Luxembourg’s image as a destination of choice for digital transformation projects, which is a very good thing for the future.”