National incentives for digital transformation in Luxembourg has been saved
National incentives for digital transformation in Luxembourg
Authors: Thierry Bovier, Konstantinos Papadopoulos
Digital transformation is inextricably linked with our era and is at the heart of the resilience enterprise strategy. Adaption to customer behavior, facing the implications of the COVID-19 pandemic, increasing productivity, launching new markets, and concentrating on value-added tasks are examples of common goals that an organization aims for when initiating digital transformation. Today, investment in digital technologies and the digital upskilling of enterprises is unavoidable in order to meet new growth opportunities. And it is not only companies that are affected; the COVID-19 pandemic has expedited the digital transformation in various other sectors such as healthcare and education. The benefit of digital transformation has never been so obvious as in this current environment. However, the questions asked by companies and organizations are related to the incentives available to start, develop, and/or consolidate their digital transformation. Here, we provide a non-exhaustive overview, without ignoring digital transformation’s creation of digital assets and data that can be exploited later on.
Incentives: What should be taken into account?
Various programs are available in Luxembourg to incentivize digital transformation either directly, or indirectly. Such programs help organizations to think about their strategies, either internally or with the help of external consultants, and/or to obtain funding while investing in digital transformation in a broader sense. While certain incentives are straightforward, others need to be carefully reviewed to see if these options are available to particular companies and organizations.
This program supports business of a certain size in the context of their post-COVID-19 economic recovery strategy. In particular, the program is planned to help enterprises analyze how they have been impacted by the crisis internally and externally, and study how to take lessons from the pandemic, both in their internal functioning (e.g. use of digital tools) and from the systemic external changes (e.g. supply chains) point of view. The objective is to support enterprises substantially with the restart of their activities and with the establishment of a short and medium-term strategic plans to encourage resilience.
The support consists of face-to-face interviews and workshops performed by expert consultants. Firstly, a diagnosis of the strategic positioning takes place including an analysis of its ecosystem, its products, etc. to weigh the consequence of the crisis. Subsequently, there is a structured reflection on the strategic options to be performed for the future, by incorporating the perspective of a more digital, circular, and regional approach. The business benefiting from the scheme commits to paying 50% of the consultancy costs, while the remaining 50% may be subsidized for an amount between a minimum of €6,000 excluding VAT and a maximum of €30,000 excluding VAT.
This scheme covers projects related to process or organizational innovation. The eligible applicants benefit from financial aid in subsidies or repayable advances which covers a percentage of the entitled costs, depending on the size of the company and the type of project or initiative. This financial aid scheme is aimed at companies and private research institutes in connection with process innovation activities (i.e. application of a new or improved production or distribution method) and organizational innovation activities (i.e. introduction of a new organizational method for business practices, workplace organization, or the company's external relations). Eligible costs may be: payroll expenses; expenses for instruments; materials; buildings (as long as they are used for the project or program) ; expenses for contractual research or research services; purchase of knowledge and patents or licenses from external sources under conditions of full competition; or, additional overheads and other operating expenses (i.e. cost of materials, office supplies, etc.) spent directly on the project or program. The amount of monetary support is capped at 50% of the permitted costs for small businesses or small private research institutes and, medium-sized companies or medium-sized private research institutes. For large companies or large private research institutes, it is capped at 15%.
This aid is for small to medium enterprises (SMEs) with innovative projects. Such companies may be eligible to benefit from subsidies, repayable advances, and/or eligible costs, with the percentage of coverage depending on the type of project, program, or activity and ranges from 50% to 100% (capped at €200,000). The program concerns private companies and research organizations. Costs may include acquisition, validation, and defense of patents and other intangible assets (e.g. licenses, know-how, etc.), occupation of highly qualified staff, and advisory and innovation support services. Innovation advisory services include advice, assistance and training in the field of knowledge transfer, the acquisition, protection and use of intangible assets and, the use of standards and regulations that contain them. Innovation support services, while aiming to develop more effective projects, procedures or services, are about databases, libraries, market research, laboratories, quality labelling, and testing and certification.
This program is a subsidy available for companies and private sector research organizations which conduct research and development (R&D) projects and innovation initiatives. It can subsidize a percentage (minimum cap of 25% and maximum of 100%) of the eligible costs, depending on the size of the company or institute and the type of project or program. All costs directly linked with the R&D projects or programs are in the scope. The financial aid is obtainable for organizations related to experimental development (capabilities in the context of developing new/improved products, processes or services), essential research, and industrial research activities.
This initiative provides financial support to enterprises and private research institutes which conduct a technical feasibility study before an R&D project or program. Examples of such projects or programs could be experimental development, essential research, or industrial research, with eligible applicants potentially benefitting from a subsidy or repayable advance. The scheme can subsidize a percentage of the allowable costs which may vary based on the size of the organization (max 50%, but it may be increased by 10% for medium-sized businesses and by 20% for small ones).
Young innovative companies may be entitled to financial aid in terms of grants, repayable advances, or equity contributions. This aid covers part of the permitted costs and the cap (at least 70% until 31 December 2021) varies based on whether the enterprise is situated in an assisted area. An important condition for eligible applicants is to be an innovative company. All expenses incurred by the participant are eligible for the duration of the project. The amount of aid is determined based on the entitled costs of the project and may not exceed €800,000 for small enterprises or small private research organizations and €1,200,000 for small enterprises or small private research organizations established in an assisted area.
Investment aid for research infrastructures involved in economic activities consists of funding construction or modernization in the form of subsidies, repayable advances, interest relief, guarantees, or loans. The definition of research infrastructures includes scientific equipment and research material, reference resources such as collections, archives and structured scientific information, enabling information and communications technology (ICT)-based infrastructures such as grid networks, computing infrastructure, software and communication systems, and any other resources required for research conduction. Eligible costs are investments in tangible assets and investments in intangible assets (i.e. patents, licenses, expertise, or other types of intellectual property). The financial aid is calculated on the basis of the eligible costs of the project and may not exceed the cap of 50%.
This is about knowledge dissemination, research enterprises, and organizations which may be eligible for financial assistance to invest in and manage innovation clusters. In particular, it is addressed to legal entities—a structure or a group composed of independent parties established in Luxembourg—to establish, modernize, or operate an innovation cluster. The objective is to encourage innovation with promotional activities, equipment sharing, exchange of knowledge and expertise, and contributions to knowledge transfer, networking, the dissemination of information, and collaboration among the parties of the cluster. Eligible costs are investments in tangible and intangible assets, and costs related to the administration of the cluster, with the amount of aid capped at 50% (may increase by 5% for innovation clusters located in assisted areas). Finally, the aid may be granted in capital subsidies, repayable advances, interest relief, guarantees, or loans.
This program aims at Luxembourg and international start-ups operating in ICT, in health technologies, or the space sector. The support comes in the form of international coaching (various coaching and workshop sessions) and subsidies. For instance, the participants are assisted with the identification of their first clients, testing of their prototype, improvement of their business plan, and presentation of their business to potential investors. The initial subsidy amounts to €50,000 and then subsequently, it is also possible to increase this subsidy by €100,000 based on specific terms and conditions.
Digitalization aid provides endorsement to companies in terms of guidance and assistance towards their digital transformation. The aid encompasses an increase of understanding and provision of information, a business diagnostic, and the subsequent formulation of suggestions and support with the application of suggested IT solutions. The program is aimed at SMEs operating in the fields of commerce, industry, crafts, or the HORECA (hotels, restaurants, catering, etc.) sector. The scheme covers all costs concerning the business diagnostic provided by an approved consultant up to a maximum amount of €5,000 excluding VAT. Participants who opt for the application of the advice proposed by the consultant may also benefit from the SMEs’ aid scheme to cover the cost of consultancy services provided by external specialists, or take advantage of the investment aid for SMEs (if there are investments in equipment and software), or cover investments in relation to the Fit 4 Digital project (equipment, software) with the investment aid scheme for SMEs.
This proposition supports the digital transition focusing on very small enterprises and SMEs, and provides customized and financial support. It addresses companies which intend to promote their visibility and reputation online, reinforce their prospecting and customer retention, boost their turnover, make their daily work easier and refine their internal output, presence on online platforms, and/or intend to upgrade their inventory supervision. The applicants may opt for available packages related to, for instance, digital marketing, customer management, or organizational management. The participants are entitled to a one-off reimbursement of €5,000 on the condition that they must pay a minimum package price of €6,650 excluding VAT.
This scheme concerns SMEs operating in the sectors of commerce, industry, craftsmanship, and/or HORECA, which are seeking to upgrade the quality of their customer services. In particular, it covers the costs of an expert to conduct a diagnostic for the assessment of the quality of customer services, to then enhance the quality of such services. The applicants receive up to €6,000 excluding VAT for the diagnostic expenses. In addition, participants who resolve to apply the measures suggested during the diagnostic stage may benefit from the SME aid scheme to make use of other consultancy services rendered by external experts, or take advantage of the investment aid for SMEs.
This program aims at supporting SMEs with the optimization of their operations and subsequently, release of both human and financial resources by introducing the involvement of external consultants. Thus, resources can be reallocated to various medium and long-term innovation projects. The objective is to eradicate inefficient processes, raise productivity and quality, and, in particular, to discover areas of innovation.
The program is split into two stages. Firstly, the analysis of the business’ performance (diagnosis stage) enables the participant to identify their improvement potential; the advisor quantifies the possible gain and comes up with an action plan. Secondly, (provided that participants wish to proceed), the application of the consultant's suggestions identified in phase one follows. Alterations should produce a result that can be reliably measured and which will be used to calculate 50% of the expert’s payment. The first stage is subsidized by a 50% capital grant with the fixed cost of the consultancy fees capped at €15,000 excluding VAT. The second phase is also subsidized with 50% of the consultancy fees incurred.
This aims to aid businesses in financial distress (after a noteworthy decrease in turnover of at least 15%), to invest in what was cancelled or delayed due to the economic crisis caused by the COVID-19 pandemic. Its objective is to boost productivity and competitiveness in the long-term. Such investment projects may relate to development projects, process and organizational innovation projects, and projects involving energy efficiency or exceeding environmental standards.
A development project comprises the extension of an existing establishment (e.g. augmentation in production capacity), the diversification of production, the shifting of an existing establishment to new or additional products or services, or a radical change of a current establishment's whole production procedure or service. The program pays particular attention to circular economy development projects that are composed of developing circular products and solutions. The scheme applies to any economic activity that contributes significantly to the protection of the environment provided that it meets specific criteria. Additionally, eligible projects may relate to process innovation, energy efficiency and project for going beyond environmental standards. The investment (allowable costs, excluding taxes) must amount to at least €20,000 for SMEs, €50,000 for medium, and €250,000 for large ones. Finally, the maximum amount of government funding depends on the type of investment project and the size of the business and it ranges from 20% to 50%.
Initially, the aid was scheduled to expire on 30 June 2021, however, it has been extended until the end of the year. In practice, companies will be able to submit their file until 1 November 2021 at the latest, while the aid will be granted by the end of 31 December 2021.
Finally, the maximum amount of aid per company increased from €800,000 to €1,800,000 (the maximum aid intensity is maintained at 50% of eligible costs).
Creation of digital assets in a digital transformation
This range of available financial aids should boost investment in digital transformation. However, putting aside those financial aspects, the transformation of a part or an entire business segment of an enterprise leads to the creation of digital assets. These assets may be recognized or not by the companies, i.e. booked into the balance sheet or considered as off-balance sheet items, and therefore it is crucial for enterprises to look at their intellectual property strategy at the same time as their digital transformation.
Outsourcing and/or insourcing a digital transformation investment is not an easy decision from the perspective of creating a digital asset—a thinking process should be initiated to consider the pros and cons of an option versus another.
Other mid- to long-term financial benefits may be obtained depending on the choice made at the time of the digital transformation launched by a company. Reference is made here to the exploitation of those digital assets, for instance the future internal and/or external exploitation of intellectual property created upon the digital transformation or the exploitation of data collected internally or externally as a consequence of a digital transformation.
From a Luxembourg tax perspective, the law of 17 April 2018 introduced the IP tax regime which is based on the modified “nexus approach”, as outlined in the final BEPS Report of Action 5. Effective as of 1 January 2018, the nexus approach is focused on creating a direct connection between expenses, the IP assets, and the income that can benefit from the regime. In other words, eligible net income from qualifying rights (such as inventions protected under patents as well as software protected by copyright nationally/internationally) is benefiting from an 80% tax exemption and the qualifying rights from a 100% net wealth tax exemption. The nexus approach requires the company to continuously and consistently monitor R&D expenditures incurred in connection with the creation, development, or improvement of a qualifying asset.
The main prerequisites are expenditures directly linked to the creation, development, or improvement of an eligible IP asset and the costs incurred by the taxpayer (directly or through a permanent establishment in an European Economic Area Member State, but always attributed to the taxpayer under a double tax treaty) after 31 December 2007. R&D expenditures are not required to be fully incurred by the taxpayers, but the proportion of expenditures incurred at their level will have an impact on the portion of exempted IP income through the application of the “nexus ratio”.
The regime may be attractive to those working on a digital transformation. However, specific attention should be paid when aiming at benefiting from incentives as described above and the IP Box regime.
Digital transformation is necessary and appealing for businesses. However, considerations should be made in advance to determine the overall strategy to be applied, as these decisions will have immediate to long-term financial impacts. From a macro perspective, in April 2021, Luxembourg presented the Plan for Recovery and Resilience (PRR) under the umbrella of the European Union recovery plan. It is already known that Luxembourg will allocate approximately €93.53 million to the following three pillars of the PRR (i.e., €76.64 million in the years 2021 and 2022, and approximately €16.89 million in 2023, this second tranche being subject to change depending on economic developments): (i) cohesion and social resilience, (ii) green transition and, (iii) digitalization, innovation, and governance. Luxembourg also plans to invest a total of approximately €1 billion over the period 2021-2024 to strengthen further skills, infrastructure, competitiveness, and continuing education in the field of digitization of the Luxembourg economy. The digitalization plan as outlined in the PRR aims to, among others, strengthen and diversify the professional skills of job seekers by providing training courses for the development of their digital skills. The PRR’s objective also includes the digital modernization of public administration and the development of an ultra-secure means of communication based on quantum technology by promoting the participation of private sector companies and researchers.
All in all, it seems that Luxembourg has incentivized the digital transformation of companies through several financial aid schemes and the goal is to boost the digitalization. However, these aids are not automatically triggered and are subject to the preparation of specific requests that can take a long time to obtain. In order to switch from a local ecosystem to a large ecosystem, it appears that now a choice should be made by Luxembourg to be competitive and attract new players for innovative projects in the country. Decisions should be made sooner rather than later regarding automatic and simple incentives available for innovative projects and players committed to digitalization and beyond.
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