Luxembourg introduces new IP tax regime

On 4 August, the Luxembourg Government submitted its long awaited bill of law for the introduction of a new tax regime in order to increase intellectual property (“IP”) developments (the “Bill of Law”). The new regime follows just over one year after the Luxembourg government abolished its former IP regime as from 30 June 2016 (subject to grandfathering rules in effect until no later than 30 June 2021). Once the bill of law is enacted, the new IP regime should become effective as of 2018.

The introduction of a new IP regime supports the Luxembourg Government’s strategy to maintain a competitive tax system while being fully compliant with international standards (i.e. in order to comply with OECD BEPS Action 5). This standard, which is built on the modified nexus approach, requires substantial activity and investments in R&D expenditures to be line with value creation in order for any IP preferential regime to be acceptable.

The increased importance of IP activities is recognized at European and national levels. In fact, the European Patent Office and the European Union Intellectual Property Office highlight in a joint report the importance of that sector at the European level. To further support Luxembourg as a hub for IP activities, the Luxembourg government introduced a series of measures providing financial and logistic support to R&D activities in May 2017.

According to the Bill of Law, 80% of the Adjusted Net Eligible Income (as defined) derived from an Eligible Asset (as defined) qualify for a tax exemption. Furthermore, such Eligible Asset are equally exempt from the (0.5%) net wealth tax.

According to the Bill of Law an Eligible Asset includes (a) patents, (b) utility models, (c) complementary protection certificates for patents for medicine and plant protection products, (d) extensions of a complementary protection certificate for pediatric medicines, € plant variety certificates, (f) orphan drug designations and (g) software protected by national copyrights, provided such Eligible Asset was constituted, developed or improved after 31thDecember 2007. The definition of Eligible Asset clearly excludes IP assets with a commercial or marketing nature (e.g. trademarks, tradenames, logos etc.).

Net Eligible Income is defined as the product of Eligible Income (as defined) reduced by the Total Costs (defined) as well as all costs that are indirectly linked to the Eligible Asset and which are attributable to the same accounting year.

Eligible Income includes (a) royalties, (b) income in direct relation with Eligible Assets which are incorporated into the sale price of services or products, (c) income arising from the sale of an eligible asset and (d) indemnities obtained within the framework of a legal proceeding or of an arbitrage concerning eligible assets.

Total Costs is defined as the sum of (i) the Eligible Costs (defined), (ii) the acquisition costs of an Eligible Asset and (iii) costs of R&D activities carried out in direct relation to the constitution, the development or the improvement of an Eligible Asset which have been outsourced to related parties.

Lastly, Eligible Costs is defined as the total sum (i) expenses (excluding the acquisition costs of the Eligible Asset, interest expenses, financing costs and real estate costs) that have a direct relation with R&D activities aimed directly at the constitution, development or improvement of an Eligible Asset, (ii) expenses incurred by a permanent establishment located in the European Economic Area other than Luxembourg (which is operational at the time the income is derived and does not itself benefit of a tax regime similar to the IP tax regime in the country of its establishment) and (iii) costs of R&D outsourced directly or indirectly to third parties. It is clarified that the Eligible Costs must to be taken into account as and when they are incurred, whatever their accounting or tax treatment.

Subsequently the Adjusted Net Eligible Income qualifying for the 80% tax exemption is determined by multiplying the Net Eligible Income by a ratio equal to (i) the Eligible Costs plus 30% thereof over (ii) the Total Costs.

The Bill of Law provides that the 80% tax exemption is in principle (subject to exceptions) to be applied on the basis of each IP individually.

The Bill of Law provides for measures in cases where an IP that still benefits from the grandfathering rules under the former IP tax regime and equally qualifies under the proposed IP regime. In such cases, the taxpayer will have to choose which regime to apply until 30 June 2021. Any choice made applies irrevocably for the remaining period until 30 June 2021 and applies to all Eligible Assets which are covered by both the former and the newly proposed IP tax regime.

For any further information as regards the Bill of Law, please contact the authors of this article (Michiel Boeren, Jean-Luc Dascotte, Maxime Grosjean and Stephen Lamothe of Tiberghien).