Investment grant in Luxembourg: how to account for it

How do you account for an investment grant in Luxembourg?

An investment grant in Luxembourg is recognised on the liabilities side of the balance sheet, within equity, at item A.VIII "Capital investment grants", and not as income of the year it is received. It reaches the profit and loss account later, through successive releases, at the pace at which the subsidised asset is consumed.

The reasoning follows the nature of the aid. A grant awarded to buy a machine does not reward the year that receives it: it funds an asset that will serve for several years. Taking it to income in full in the year of the transfer would inflate a result the company has not earned, then leave the following years to carry the depreciation alone. Routing it through equity, then releasing it over time, puts the income back opposite the charge it offsets.

The mechanism assumes two separate entries and asset-by-asset monitoring. On award, the grant is recorded at item A.VIII for its amount, leaving the carrying value of the fixed asset untouched at its full acquisition price in the annual accounts. At each year end, a fraction is released to income. Nothing is netted off in the balance sheet: the gross asset and the grant sit side by side, which keeps the investment actually made readable.

Why does item A.VIII have no European counterpart?

Item A.VIII is a Luxembourg peculiarity: directive 2013/34/EU provides no dedicated heading for capital investment grants, any more than the former fourth directive 78/660/EEC did, and Luxembourg chose to keep it because many companies in the country were already using it.

The Commission des normes comptables set out that choice when the 2016 balance sheet and profit and loss account layouts came in, in its question and answer 16/010: noting that a number of Luxembourg undertakings used the item, it decided to retain it, in line with accepted practice in France and Belgium. The item therefore outlives a directive that does not know it.

The consequence is concrete for a foreign group. A parent consolidating under IFRS, or under any framework without such an item, will have to reclassify the line, usually as deferred income or as a deduction from the asset: the Luxembourg item finds no mirror in the group chart of accounts. We regularly see that reclassification discovered at the first reporting cycle, when it belonged in the initial mapping setup. The Luxembourg balance sheet layout sits in the amended law of 19 December 2002, whose article 34 fixes the items, the grand-ducal regulation of 18 December 2015 determining their form and content.

Which standard chart of accounts accounts does a grant use?

Capital investment grants occupy heading 16 of the standard chart of accounts, broken down by the nature of the asset financed, and their release to income runs through account 747, one subdivision of which is reserved for them. Operating grants, by contrast, sit among operating income.

One point of method is needed on that numbering. The applicable standard chart of accounts is the one determined by the grand-ducal regulation of 12 September 2019, published in Mémorial A631 and applicable to financial years beginning on or after 1 January 2020, the provisions on the operation of the chart and on the transition table having taken effect on 4 January 2021.

The annex to that regulation is not readable from our drafting environment: the numbers in the table below are those of the chart annexed to the grand-ducal regulation of 10 June 2009, as published by the Commission des normes comptables, and should be checked against the annex in force before any system setup. Our article on the standard chart of accounts sets out the seven-class structure.

Two general rules of the 2019 regulation frame that setup and are worth recalling: an undertaking records its transactions only in the chart's posting accounts, and where no account fits fully, it uses the one that best corresponds to the transaction concerned. An aid whose classification wavers between investment and operating does not therefore create a bespoke account: it attaches to the closest existing account, and the justification for that attachment belongs in the year-end file.

Operating grant or investment grant: where is the line drawn?

The line follows what is financed, not the form of the aid: an operating grant covers a charge or income of the year and is taxable as soon as the claim on the public authorities arises, whereas an equipment grant funds a fixed asset and is not taxed immediately.

The two regimes therefore have nothing in common. For the operating grant, the Guichet.lu portal is blunt: no favourable treatment, and taxation follows the moment the claim arises, without waiting for the cash. An aid notified in December and paid in February attaches to the year of notification, which creates a receivable on the asset side and taxable income in accounts the cash position does not yet reflect.

For the equipment grant, taxation is deferred and indirect: it materialises only on a disposal of the asset concerned that produces a gain, since the asset's tax value has been reduced accordingly. The classification therefore deserves to be settled on award, with the aid file in hand, rather than at the year end: the name of the aid scheme does not settle it, what governs is the destination of the costs retained.

How does tax law treat an equipment grant?

Luxembourg tax law does not run the equipment grant through income: it is deducted from the acquisition cost of the fixed asset borne by the company, and it is that price actually paid which serves as the basis for computing depreciation. The deductible annual charge is therefore lower, for an unchanged useful life.

The rule can be read in two converging places. The direct tax administration states that assets whose acquisition or production has been subsidised by the State or a municipality are to be brought in at the price the taxpayer actually paid, that value also serving as the basis for computing depreciation.

Circular L.I.R. no. 128ter/1 of 26 July 2022 applies the same reasoning to farmers, where the capital grants allocated by the State are to be deducted from the overall acquisition price of the equipment and tools acquired. Article 25 of the income tax law, which defines the acquisition price as all the expenditure borne by the taxpayer to bring the asset into its condition at the valuation date, supplies the framework for that reading.

The gap with the accounts is structural, and that is the point to retain. The balance sheet carries the asset at its full acquisition price and the grant in equity; tax law knows only an asset net of the grant. The two depreciation schedules therefore diverge from the first year, in a way the accounting charge alone does not reveal, and the tax depreciation schedule has to be kept separately. We regularly see files where only one schedule exists, the accounting one, with depreciation deducted on a gross base the administration does not accept.

What effect does a grant have on the investment tax credit?

The grant cuts the tax advantage a second time: the base of the investment tax credit is net of the grant. Form 800 F of the direct tax administration carries the rule in a footnote, the acquisition price, the cost price and the operating expenditure being reduced accordingly by any grants awarded.

The obligation is also a reporting one, not merely arithmetical. For the certificate application, the Guichet.lu portal specifies that the amount of the grant is to be deducted from the investments or the operating expenditure, and reported separately. The applicant therefore does not choose between deducting and declaring: it does both, and a gross base carried over as such into the annex is corrected at the cost of an adjustment to the tax charge.

The combined effect deserves to be quantified before a financing plan is built. One and the same grant cuts the depreciation base, hence the deductible charge spread over the life of the asset, and the base of the investment tax credit, hence a direct reduction of the tax charge. The aid remains favourable in cash terms, but its net after-tax return is lower than its face amount, and it is that comparison, rather than the headline intervention rate, that allows a choice between an aid and bank financing. The same reasoning applies to a digitalisation aid such as SME Packages.

Which mistakes do we see on grants in practice?

Three mistakes recur in files taken over: the grant taken to income in the year of receipt, the release of item A.VIII never started, and the tax depreciation base left at the gross acquisition price. All three distort the result, in two opposite directions.

The first is quickly diagnosed. A grant taken straight to operating income inflates the result of the year of receipt, then penalises the following years, where depreciation runs with nothing against it. The error shows in the annual accounts of a company in which a single year posts an atypical result with no operational explanation, and it is corrected by a documented reclassification rather than by a simple adjusting entry.

The second mistake is quieter: item A.VIII stays frozen in the balance sheet, year after year, because nobody picked the asset-by-asset monitoring back up. Equity then carries a line matching no asset still in service, and it passes unremarked through every set of accounts put to the annual general meeting.

The third is the most expensive. Where the tax depreciation schedule was not built on the reduced base, the gap accumulates silently over the whole life of the asset, and surfaces only on audit, or when a tax return is taken over by a new adviser. The useful habit is a plain one: for each subsidised asset, a single sheet carrying the acquisition price, the grant, the reduced tax base, the full accounting base and the release plan for item A.VIII. It fits on one page and avoids all three mistakes at once.

Sources and verification

Written for Financial Services Luxembourg and reviewed before publication by Mickaël LOC, authorised accountant (authorisation 10077274). Item A.VIII and its retention, the legal basis of the balance sheet layout, the standard chart of accounts accounts, the line between operating grant and equipment grant, the reduction of the acquisition price and of the depreciation base, and the reduction of the investment tax credit base were verified on 19 October 2026 against the sources below.

The sources consulted are as follows. From the Commission des normes comptables: its question and answer 16/010 on the practical consequences of the 2016 balance sheet and profit and loss account layouts, for the absence of any dedicated item for capital investment grants in directive 2013/34/EU as in the former fourth directive 78/660/EEC, for the decision to retain item A.VIII on the ground that a number of Luxembourg undertakings used it, and for the comparison with French and Belgian practice;

the standard chart of accounts annexed to the grand-ducal regulation of 10 June 2009 that it publishes, for heading 16 and its subdivisions 161, 162, 163 and 168, for account 744 on operating grants and its subdivisions 7441, 7442 and 7448, and for account 747 and its subdivision 7473; its press release publishing the 2020 standard chart of accounts.

From Legilux: the grand-ducal regulation of 12 September 2019 determining the content of the standard chart of accounts referred to in article 12 of the Commercial Code, published in Mémorial A631, for its application to financial years beginning on or after 1 January 2020, for the effect on 4 January 2021 of the provisions on the operation of the chart and on the transition table, for class 1 covering equity, provisions and financial debts, for recording in posting accounts only, and for the rule of the account best corresponding to the transaction;

the amended law of 19 December 2002 on the trade and companies register and on the accounting and annual accounts of undertakings, whose article 34 fixes the balance sheet items; the grand-ducal regulation of 18 December 2015 determining the form and content of the balance sheet and profit and loss account layouts.

From the Guichet.lu portal: its page on exceptional transactions in the computation of net income, for the absence of favourable treatment of operating grants and their taxation as soon as the claim on the public authorities arises, for the deduction of the equipment grant from the acquisition cost borne by the company, for the absence of immediate taxation and the indirect taxation on disposal where a gain arises, and for the reduction of the depreciation base;

its page on the certificate for the tax credit, for the deduction of the grant from the investments or the operating expenditure and for the obligation to report its amount separately; its page on the chart of accounts for undertakings. From the direct tax administration: its form 800 F "Bonification d'impôt pour investissement" and its English version 800 E, for the footnote reducing the acquisition price, the cost price and the operating expenditure accordingly by any grants awarded;

its Mémento fiscal, for bringing assets subsidised by the State or a municipality in at the price actually paid by the taxpayer and for that value serving as the basis for computing depreciation; its circular L.I.R. no. 128ter/1 of 26 July 2022, for the deduction from the overall acquisition price of equipment and tools of the capital grants allocated by the State; its "Immobilisations amortissables" page and article 25 of the income tax law for the definition of the acquisition price.

Five points could not be verified against an official source at this date. The primary text first: the domains guichet.public.lu, legilux.public.lu, impotsdirects.public.lu and cnc.lu are blocked by the network proxy of our drafting environment, and those pages were read through indexed extracts using a search restricted to official domains; the statements above reproduce those extracts without extrapolation. Next, the annex to the standard chart of accounts in force: the numbering quoted is that of the 2009 chart, and the account-by-account correspondence with the annex to the regulation of 12 September 2019 could not be established, hence the reservation carried in the table.

Next, the number of the article of the income tax law carrying the rule that the grant is deducted from the acquisition price: the pages read state the rule without citing it, and no number is therefore put forward here. Next, the pace of the release of item A.VIII, which no text consulted prescribes: alignment with the depreciation of the subsidised asset is the practice the release accounts make possible, not an obligation we have read. Lastly, the fate of that release in the tax return, overall consistency suggesting that income corresponding to a grant already set against the acquisition price is not taxed a second time, without any page consulted stating it.

These points can be verified on legilux.public.lu, on cnc.lu, on impotsdirects.public.lu and with the competent tax office.

This article sets out the state of the law at the date of publication and does not constitute personalised legal or tax advice: the classification of the aid, the release pace adopted, the depreciation base that can be relied on and the computation of the tax credit depend on the aid scheme concerned, the nature of the asset financed, the accounting framework applied and the company's own situation. Texts, regulations, forms and practices change, and any decision binding your structure should be verified at the date you rely on it. Report an error to contact@financialservices.lu: the correction is dated in the article.