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28.6 Luxembourg Tax Incentives for SMEs

Understanding Tax Incentives​

Luxembourg offers various tax incentives designed to support SMEs, encourage investment, promote innovation, and stimulate economic growth. Understanding and utilizing these incentives can significantly reduce your effective tax rate.

Investment Tax Incentives​

1. Investment Allowance​

Qualifying Investments:

  • New equipment and machinery
  • IT infrastructure and software
  • Energy-efficient equipment
  • Certain building improvements

Allowance Rate:

  • Up to 8% investment allowance
  • Applied to qualifying investment cost
  • Reduces taxable profit

Example:

  • Equipment investment: €100,000
  • Investment allowance (8%): €8,000
  • Taxable profit reduction: €8,000
  • Tax savings: €8,000 × 24.94% = €1,995

2. Accelerated Depreciation​

Accelerated Depreciation Options:

  • Can accelerate depreciation in first year
  • Up to 50% in first year for qualifying assets
  • Reduces taxable profit in early years

Benefits:

  • Improves cash flow in early years
  • Reduces tax burden when business is growing
  • Encourages investment

Research and Development (R&D) Incentives​

R&D Tax Credits​

Qualifying R&D Activities:

  • Research and development projects
  • Innovation activities
  • Technology development
  • Product development

Tax Credit Rate:

  • Up to 20% tax credit on R&D expenses
  • Reduces tax liability directly
  • Can be carried forward if not fully used

Example:

  • R&D expenses: €50,000
  • Tax credit (20%): €10,000
  • Direct tax reduction: €10,000

R&D Expense Deductions​

Fully Deductible:

  • R&D salaries and wages
  • R&D materials and supplies
  • R&D equipment (with depreciation)
  • External R&D services

Double Benefit:

  • Full deduction reduces taxable profit
  • Additional tax credit reduces tax liability

Innovation Incentives​

IP Box Regime​

Intellectual Property Income:

  • Qualifying IP income taxed at reduced rate
  • 5% tax rate on qualifying IP income
  • Significant reduction from standard rate

Qualifying IP:

  • Patents
  • Software copyrights
  • Certain trademarks
  • Other qualifying IP assets

Conditions:

  • Must meet substance requirements
  • Must be developed or acquired under specific conditions
  • Ongoing compliance required

Employment Incentives​

Job Creation Incentives​

New Job Creation:

  • Tax incentives for creating new jobs
  • Reduces tax burden when hiring
  • Encourages employment growth

Qualifying Conditions:

  • New permanent positions created
  • Specific job types may qualify
  • Must meet certain criteria

Regional Development Incentives​

Location-Based Incentives​

Certain Regions:

  • Special incentives for businesses in specific regions
  • Encourages regional development
  • May include tax reductions or credits

SME-Specific Incentives​

Small Business Deductions​

SME Benefits:

  • Reduced rates for small businesses
  • Special deductions for SMEs
  • Simplified compliance for small businesses

Start-Up Incentives​

New Business Benefits:

  • Special deductions for new businesses
  • Reduced rates in early years
  • Encourages entrepreneurship

How to Access Incentives​

Step 1: Identify Qualifying Activities​

  • Review your business activities
  • Identify qualifying investments
  • Identify R&D activities
  • Identify other qualifying activities

Step 2: Maintain Documentation​

  • Keep detailed records of qualifying expenses
  • Document R&D activities
  • Maintain investment documentation
  • Keep all supporting documents

Step 3: Claim in Tax Return​

  • Include in annual tax return
  • Provide required documentation
  • Calculate credits and allowances
  • Submit with tax return

Step 4: Professional Support​

  • Consult tax advisor
  • Ensure proper qualification
  • Maximize available incentives
  • Maintain compliance

Luxembourg Compliance Note​

Important Requirements:

  • Qualification: Ensure activities qualify for incentives
  • Documentation: Maintain proper documentation
  • Compliance: Meet all compliance requirements
  • Substance: Meet substance requirements (for IP Box)
  • Professional advice: Consult tax advisor for complex incentives

Common Issues:

  • Missing opportunities: Not identifying qualifying activities
  • Insufficient documentation: Not maintaining proper records
  • Compliance failures: Not meeting compliance requirements
  • Incorrect claims: Claiming incentives incorrectly

Think It Through​

TechLux Solutions spends €100,000 on R&D activities and invests €200,000 in new equipment. What tax incentives can they access? How much can they save?

Concepts in Practice​

Maximizing Tax Incentives

TechLux Solutions tax incentive planning:

R&D Activities:

  • R&D expenses: €100,000
  • Tax credit (20%): €20,000
  • Direct tax reduction: €20,000

Equipment Investment:

  • Equipment investment: €200,000
  • Investment allowance (8%): €16,000
  • Taxable profit reduction: €16,000
  • Tax savings: €16,000 × 24.94% = €3,990

Total Tax Benefits:

  • R&D tax credit: €20,000
  • Investment allowance savings: €3,990
  • Total tax reduction: €23,990

Effective Tax Rate Reduction:

  • Without incentives: 24.94%
  • With incentives: Significantly reduced