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28.2 Tax Deductions and Allowances for SMEs

Understanding Tax Deductions​

Tax deductions reduce taxable profit, thereby reducing tax liability. Luxembourg offers various deductions and allowances specifically designed to support SMEs and encourage business investment.

Common Tax Deductions​

1. Business Expenses​

Fully Deductible Expenses:

  • Salaries and wages
  • Rent and utilities
  • Professional services (accounting, legal)
  • Marketing and advertising
  • Travel and entertainment (with limits)
  • Depreciation on business assets
  • Interest on business loans
  • Bad debts (with conditions)

Example:

  • Revenue: €100,000
  • Deductible expenses: €60,000
  • Taxable profit: €40,000

2. Depreciation Deductions​

Straight-Line Depreciation:

  • Standard rates apply to different asset categories
  • Buildings: 2-4% per year
  • Equipment: 10-20% per year
  • Vehicles: 20-25% per year
  • IT equipment: 33.33% per year

Accelerated Depreciation:

  • Available for certain investments
  • Can accelerate depreciation in first year
  • Reduces taxable profit in early years

Example:

  • Equipment purchase: €10,000
  • Standard depreciation (20%): €2,000 per year
  • Accelerated (50% first year): €5,000 in year 1

3. Research and Development (R&D) Deductions​

R&D Expenses:

  • R&D costs are fully deductible
  • Additional R&D tax credits may apply
  • Encourages innovation and development

Qualifying R&D Expenses:

  • Salaries of R&D staff
  • R&D materials and supplies
  • R&D equipment (with depreciation)
  • External R&D services

4. Interest Deductions​

Business Interest:

  • Interest on business loans fully deductible
  • Interest on capital contributions may be limited
  • Thin capitalization rules apply

Example:

  • Business loan interest: €5,000
  • Fully deductible from taxable profit

SME-Specific Allowances​

1. Investment Allowance​

Qualifying Investments:

  • New equipment and machinery
  • IT infrastructure
  • Energy-efficient equipment

Allowance Rate:

  • Up to 8% investment allowance
  • Reduces taxable profit
  • Encourages business investment

Example:

  • Equipment investment: €50,000
  • Investment allowance (8%): €4,000
  • Reduces taxable profit by €4,000

2. Start-Up Deductions​

New Business Deductions:

  • Special deductions for new businesses
  • Reduced rates for first years
  • Encourages entrepreneurship

3. Training Deductions​

Employee Training:

  • Training costs fully deductible
  • Encourages workforce development
  • Includes external training and courses

Non-Deductible Expenses​

Expenses NOT Deductible:

  • Personal expenses
  • Fines and penalties
  • Dividends paid
  • Corporate income tax itself
  • Certain entertainment expenses (beyond limits)
  • Political contributions

Tax Losses​

Loss Carry-Forward​

Unused Losses:

  • Tax losses can be carried forward
  • Carry-forward period: Unlimited (with conditions)
  • Reduces future taxable profit

Example:

  • Year 1: Tax loss of €20,000
  • Year 2: Taxable profit of €50,000
  • Loss carry-forward: €20,000
  • Taxable profit after carry-forward: €30,000

Loss Carry-Back​

Limited Carry-Back:

  • Limited carry-back may be available
  • Subject to specific conditions
  • Can provide tax refunds

Luxembourg Compliance Note​

Important Requirements:

  • Documentation: Maintain documentation for all deductions
  • Substantiation: Be able to substantiate business purpose
  • Limits: Be aware of deduction limits and restrictions
  • Timing: Understand when expenses are deductible
  • Professional advice: Consult tax advisor for complex deductions

Common Issues:

  • Personal expenses: Claiming personal expenses as business deductions
  • Insufficient documentation: Not maintaining proper documentation
  • Timing errors: Deducting expenses in wrong tax year
  • Exceeding limits: Claiming deductions beyond allowed limits

Think It Through​

TechLux Solutions invests €100,000 in new IT equipment. They can use either standard depreciation (20% per year) or accelerated depreciation (50% in first year). Which option should they choose from a tax perspective? What other factors should they consider?

Concepts in Practice​

Maximizing Tax Deductions

TechLux Solutions tax planning:

Revenue: €500,000 Expenses:

  • Salaries: €200,000
  • Rent: €50,000
  • Equipment (new): €100,000
  • R&D costs: €30,000
  • Other expenses: €70,000

Tax Planning:

  • Standard depreciation (20%): €20,000
  • Investment allowance (8%): €8,000
  • R&D fully deductible: €30,000

Taxable Profit Calculation:

  • Revenue: €500,000
  • Total expenses: €450,000
  • Depreciation: €20,000
  • Investment allowance: €8,000
  • Taxable profit: €422,000

Tax Savings:

  • Investment allowance saves: €8,000 × 24.94% = €1,995
  • Accelerated depreciation option could save more in year 1