Zirconia is a relatively new material with many promising practical applications in medical imaging, biolabeling, sensors, and other fields. In this study we have investigated lanthanide and niobium doped zirconia by luminescence and XRD methods. It was proven that charge compensation in different zirconia phases determines the incorporation of intrinsic defects and activators. Thus, the structure of zirconia does not affect the Er luminescence directly; however, it strongly affects the defect distribution around lanthanide ions and the way in which activator ions are incorporated in the lattice. Our results demonstrate the correlation between the crystalline phase of zirconia and charge compensation, as well as the contribution of different nanocrystal grain sizes. In addition, our experimental results verify the theoretical studies of metastable (tetragonal, cubic) phase stabilization determined using only oxygen vacancies. Moreover, it was found that adding niobium drastically increases activator luminescence intensity, which makes Ln3+ doped zirconia even more attractive for various practical applications. Although this study was based on the luminescence of the Er ion, the phase stabilization, charge compensation, and luminescence properties described in our results are expected to be similar for other lanthanide elements. Our results suggest that the luminescence intensity of other oxide matrices where lanthanides incorporate in place of tetravalent cations could be increased by addition of Nb ions.