Luxembourg is committed to achieving climate neutrality by 2050. To achieve this, the climate law and the PNEC provide for a 55% reduction in greenhouse gas emissions by 2030 (compared with 2005), a 25% share of renewable energies in final energy consumption and a 44% increase in energy efficiency by 2030.
Luxembourg will only be able to achieve these targets if all the players involved, from the public to the private sector, redouble their efforts. After the public authorities, companies are also concerned by this issue. Let’s not forget that companies play a central role in driving economic growth and supplying the country with goods and services. Consequently, they must become a major player in sustainable development and the decarbonisation of the economy, through the impetus of both coercive and incentive public policies.
However, even if companies can – and must – be a driving force in this area, they are also faced with other challenges likely to hamper their climate transition initiatives: rising energy prices, the imperatives of digital transformation, and unprecedented tensions on the skilled labour market.
TAXATION MUST BE A LEVER FOR THE ECOLOGICAL TRANSITION OF COMPANIES
Given this situation, there is an urgent need to support companies in their investments in the ecological transition, but also in the digital transition (in support of the ecological transition), in particular by introducing targeted tax incentives to accelerate progress in this area.
As the Chamber of Commerce recently pointed out on the occasion of the publication of its thematic booklet “Accelerating the ecological and energy transitions with a favourable framework” in the context of the 2023 elections: “while companies in the Grand Duchy have already made many efforts to initiate and accelerate the switch from fossil fuels to green energy, they will need to be given even more support, guidance and involvement in the ecological and energy transition if they are to achieve the climate neutrality target by 2050 and the various intermediate deadlines”[1].
But many countries are ahead of the game. The most obvious example is the United States: in August 2022, the Biden administration introduced a stimulus bill (the Inflation Reduction Act) aimed at increasing the use of clean energy sources, by introducing tax incentives in the form of tax credits worth 270 billion dollars[2]. The aim of the American legislator is to accelerate the ecological transition while developing investment and economic growth in the country.
Some European countries reacted immediately to this American initiative, aware of the competitive advantage it will give them in this area. These countries are planning to improve existing tax incentives for companies involved in the fight against climate change, in order to maintain the tax competitiveness of their countries and their companies. This is particularly the case in Germany and Belgium. Belgium’s Finance Minister has announced that from 2024 he wants to strengthen “tax measures to encourage business investment in sustainable transition, but also to “respond to concerns about the US Inflation Reduction Act“[3]. It’s a safe bet that other countries will soon follow suit.
REFORM OF THE INVESTMENT TAX CREDIT IS A KEY FIRST STEP
In this context, one of the tax measures proposed by UEL and the Chamber of Commerce is the introduction of a tax credit or super tax deduction for companies investing in green and digital technologies.
This request led to the announcement of the adaptation of the tax measure of the investment tax credit, endorsed by the government and the social partners as part of the tripartite meeting in September 2022. The purpose of this adaptation is to extend the scope of the current measure to investments to be made by Luxembourg companies in digital transformation and ecological transition projects.
The new measure is due to come into force on 1 January 2024. It will be fully in line with the European Commission’s recommendations to introduce tax relief, particularly in the form of tax credits, to support green investments and investments in clean technologies as well as in digital transition, as formulated in the Green Pact Industrial Plan published in February 2023[4].
The current tax credit will also have to be adapted to take account of the new European and international tax rules aimed at introducing minimum taxation (known as the “pillar 2” rules) for multinational companies. If such a change were not made by the legislature, additional taxation could be payable by the companies concerned, wiping out the advantage initially granted to them (potentially to the benefit of other countries) and making the Luxembourg regime possibly less competitive than foreign regimes.
WE MUST ACT NOW TO HAVE AN IMPACT ON THE FUTURE
In Luxembourg, the adaptation of the investment tax credit is therefore welcome in order to meet the challenges of the ecological and digital transition, in a context of increased tax competition between countries. However, this should only be the first step towards a broader overhaul of the various existing tax incentives. A holistic approach is needed to ensure that we meet Europe’s ambitions in terms of climate transition and to encourage businesses not only to become the driving force behind this transition, but also to make their investments mainly in Luxembourg and not abroad.
The stakes are high, and so must be our ambitions.
The latest IPCC report[5], which has just been made public, confirms that greenhouse gas emissions have continued to rise sharply over the last decade. The IPCC therefore reiterates the extreme urgency of accelerating our actions now to limit global warming to less than 2°C. If we fail to do so, the impacts of climate change will continue to worsen, making them even more complex to manage, affecting people and our entire ecosystem.
The High Council for Sustainable Development also reiterated the extreme urgency of taking concrete decisions, on the occasion of its “One planet Luxembourg” initiative[6].
A HOLISTIC APPROACH TO TAXATION IS ESSENTIAL TO ACCELERATE THE ECOLOGICAL TRANSITION AND THE DECARBONISATION OF OUR ECONOMY
Such an objective can only be achieved if society as a whole accelerates its commitment to sustainable development, which requires more ambitious measures, including tax incentives.
In fact, tax incentives, in addition to existing environmental taxes and other coercive fiscal measures, will accelerate companies’ move towards new, more environmentally-friendly business models.
The question therefore arises as to whether even more ambitious measures than those taken recently should not be introduced at European level in order to speed up the fight against global warming, while strengthening the international competitiveness of our businesses and of Europe. This would involve not only taking action on the tax framework, but also ensuring that the administrative burdens and reporting costs on businesses are reduced.
In Luxembourg, such a holistic approach involves implementing the following tax measures:
- Introduce a tax measure to support business R&D activity. Innovation and technological progress must be pursued in order to protect the environment while remaining competitive. Unfortunately, Luxembourg is the exception, since 34 of the 38 OECD members and 22 of the 27 EU countries already have a tax credit for R&D costs (in 2021)[7]. In addition, the UK and Ireland have just announced an overhaul of their R&D tax credits to make them more attractive to investors and continue to stimulate their economic growth;
- Introduce a tax measure to stimulate entrepreneurship by encouraging investment by individuals in SMEs and start-ups active in the digital and environmental transition. These are the cornerstone of the country’s innovation ecosystem, the innovation that society needs to reinvent the way it operates in a sustainable way;
- Initiate a debate on the desirability of overhauling existing tax benefits according to their impact on global warming, based on the principle of “green budgeting”. For example, the benefits of existing (or future) tax incentives could be adapted or weighted on the basis of ESG criteria, or on the basis of criteria linked to the circular economy; and
- Continue to simplify tax legislation and accelerate the digitalisation of exchanges between administrations and taxpayers to limit administrative costs for companies and increase legal certainty in tax matters.
THE CARROT AND THE STICK, COMPLEMENTARY TOOLS FOR THE ECOLOGICAL TRANSITION
The introduction of tax incentives of this kind does not, of course, in any way prejudge the changes that need to be made to environmental taxes (e.g. the carbon tax or energy taxes) to ensure the ecological transition.
There is no single solution: the two approaches are in fact complementary and form part of a broader horizontal strategy to combat global warming, combining both sanctions and incentives to ensure that companies maintain and accelerate their decarbonisation efforts.