16 May 2011

New Horizons for Investment Tax Credit

The last Circular Letter on Investment Tax Credit opens up new horizons.

The Luxembourg Tax Administration issued on 31 March 2011 a circular letter extending the scope of the investment tax credit regime to investments physically carried out in other state members of the European Economic Area (E.E.A.).
This circular is a consequence of the Tankreederei I S.A. case of the European Court of Justice (E.C.J.), which considered the wording set out in the Luxembourg Income Tax Law (L.I.T.L) as contrary to the freedom to provide services provided by article 56 of the Treaty on the functioning of the European Union (“TFEU”).

The investment tax credit regime set out in the article 152bis L.I.T.L. excludes among others the investments carried out physically outside the territory of Luxembourg. This provision caused a conflict between the Luxembourg Tax Administration and the Luxembourg company Tankreederei I S.A, which expected to benefit from the investment tax credit for two merchant boats used in the harbors of Amsterdam and Antwerp. The Tax Administration refused by applying strictly article 152bis L.I.T.L..
The case has been brought by the company before the Luxembourg Administrative Court which decided cautiously to ask the E.C.J. for a preliminary ruling. The E.C.J in its Tankreederei I S.A. v. Directeur de l’Administration des Contributions Directes case, dated 22 December 2010, stated article 152bis L.I.T.L. incompatible with the freedom to provide services. Article 56 T.F.U.E prohibits indeed any restriction on freedom to provide services within the European Union.
The circular letter taken by the Luxembourg Tax Administration on 31 March 2011 applies this ruling of the E.C.J. After having taken up the wording of the E.C.J., the circular letter confirms that the investment tax credit has not only to apply to investments physically carried out on the Luxembourgish territory but also on the territory of every state member of the E.E.A., which means the 27 E.U. state members as well as Iceland, Liechtenstein and Norway. The Tax Administration explains indeed that according to the provisions of the E.E.A. Agreement, the principle drawn by the E.C.J. applies also to investments carried out physically on the territory of the States parties to the Agreement.

However the Tax Administration reminds in its publication that these investments still have to be carried out by firms located in Luxembourg.

The Luxembourgish legislation has not been amended so far but the circular letter makes clear that in the meantime the tax administrations have to apply the principle laid down by the Tankreederei S.A. case to any tax treatment where an assessment has not yet been given. This evolution of the investment tax credit regime should make Luxembourg a very interesting place for transport and leasing striving to develop business through the 30 E.E.A. state members.