Scope

By introducing a partial exemption regime for income generated through IP, the Luxembourg government intends both to encourage research activities in Luxembourg and to increase the attractiveness of Luxembourg for the holding and management of IP.

The exemption applies to income paid to Luxembourg taxpayers (individuals or companies) for the use of any software copyright, any patent, trademark, design or model.

Patents developed and used in-house may generate a deemed income deduction, under certain conditions.

Capital gains generated on IP will be exempt up to 80%.

Contrary to companies located in offshore jurisdictions, a Luxembourg resident would be entitled to benefit from a reduction of withholding tax on income received from abroad, based on the current EU directive on royalty payments or the relevant double tax treaties. In addition, the scope of intellectual property that may fall under of this new regime is larger than a similar treatment that exists in Belgium. The regime is also believed to be compliant with the Luxembourg obligations under EU regulations.


Overview of the proposed tax regime

General conditions to benefit from the IP regime (article 50bis, §§4 and 5 LIR)

Article 50bis §§ 1 and 3 LIR introduces an 80% exemption regime for income derived from IP and from the sale of IP. IP acquired from a third party may include patents, software, copyrights, trademarks, or logos, etc. In addition, article 50bis §2 provides for a deemed deduction for patents developed in-house. This exemption is limited to registered patents only. The regime is available to both individuals and corporations.

The regime is subject to the following three conditions:

- The IP must have been acquired (or created as the case may be) after December 31st, 2007;
- Expenses in direct economic connection with the IP must be recorded as an asset in the balance sheet during the first year for which the benefit of this tax regime is claimed;
- The IP may not have been acquired from a person that is assimilated to an “affiliated company”. A company A is considered as affiliated to company B in the meaning of the draft law if:
A directly holds at least 10% of the share capital of B;
B holds at least 10% of the share capital of A;
At least 10% of the share capital of A and of B is directly held by a third company.


Income from intellectual property (article 50bis, §§1 and 2 LIR)

According to the proposed article 50bis §1 LIR, any net income derived by a Luxembourg taxpayer as a consideration for the use of any copyright on software, any patent, trade mark, design or model will benefit from an 80% exemption. Net income is defined in the draft law as the gross royalty income received by the taxpayer reduced by the amount of expenses in direct economic connection with this income, including annual depreciations and write-downs.

Draft article 50bis §2 LIR allows a taxpayer that has developed and used its own patent to benefit from a notional deduction amounting to 80% of the net positive income it would have received from a third party as consideration for the right to use of the said patent. Net positive income is defined in the draft law as the fictitious gross royalty income as referred above reduced by the amount of expenses in direct economic connection with this income, including annual depreciations and write-downs, if any.

Capital gains on the disposal of intellectual property (article 50bis, §§3 and 6 LIR)

Capital gains realized on the disposal of IP as defined in §1 will benefit from an 80% exemption.

The gain will remain taxable up to the extent of the expenses in direct connection with the income as well as depreciations and write-downs that have reduced the tax base of the taxpayer in the tax year of the disposal or in any previous tax year.

If no market value is available, article 50bis §6 provides that the estimated market value of the IP as defined in article 27, al. 2 LIR could be determined according to any well accepted method for the valuation of intellectual properties. In addition, companies that fulfil the required conditions in order to be considered as SME (as defined in Grand-Ducal Decree dated March 16th, 2005) are entitled to valuate the intellectual property at 110% of the expenses that have reduced their tax base for the tax year of the disposal and of any previous tax year.

Conclusion

The present regime adequately combines two objectives. It allows for a full deduction of all R&D expenses for projects that do generate any commercial results. However, successful R&D projects are not penalized through excessive taxation once they come to fruition.

In addition, the link between the new regime and the existing participation exemption regime will enable Luxembourg to propose integrated solutions for the holding and management of both participations and IP.

Combined with the other advantages of Luxembourg economy, the new proposed IP regime will contribute to making Luxembourg an even more attractive holding jurisdiction.

Antoine Glaize