Luxembourg Minister of Finance announces that Luxembourg will amend its IP Income Tax Regime so as to align it with the “nexus” approach agreed upon within the OECD as from 1 July 2016. Undertakings that benefit from the current tax regime before that date will continue to do so until 30 June 2021.
At the end of 2007, in the framework of the Lisbon strategy for growth and employment in the EU, the Grand-Duchy of Luxembourg introduced a beneficial tax regime applicable to income from qualifying intellectual property rights. On the basis of this regime, which is embedded in Article 50bis to the Income Tax Act 1967 (the "50bis Regime"), Luxembourg undertakings and Luxembourg branches of foreign companies can benefit from an exemption of 80% on revenues derived from and capital gains realized on patent, trademark, design and domain name rights as well as from copyrights on software, to the extent that such rights have been established or acquired after 31 December 2007. The exemption brings the effective tax rate for such revenues to approximately 5.85%.
IP box regimes in several EU Member States including Belgium, Hungary, France, Luxembourg, the Netherlands, Spain and the UK were criticised for not requiring sufficient substantial activities and presence for the tax benefits to apply. These regimes were under scrutiny of the EU Code of Conduct Group on Business Taxation and of the European Commission under EU state aid rules. In addition, a common set of rules were being elaborated at the level of the OECD in the setting of the Base Erosion and Profit Shifting (“BEPS”) initiative. These developments created significant uncertainty around the future of the IP tax regimes concerned.
The European Commission has now dropped its state aid investigation. This change in approach was prompted by a joint proposal for rules on preferential intellectual property tax regimes that was made by Germany and the United Kingdom made in November 2014. The proposal is based on the so-called “nexus” approach, which makes the benefits under the IP tax regime conditional on the extent of the R&D activities pursued by the beneficiaries of this regime. The compromise has been accepted within the OECD and has been laid down in the document “OECD/G20 BEPS Project - Action 5: Agreement on Modified Nexus Approach for IP Regimes”. The agreement foresees that the current regimes should be closed to new participants as of 1 July 2016 and that taxpayers benefitting from the current regimes before that date will be able to continue to do so until 30 June 2021.
On 26 February 2015 the Luxembourg Minister of Finance declared in his reply to several questions raised by a member of the Luxembourg Parliament that the 50bis Regime will be amended in order to bring it in line with the internationally agreed “nexus” approach. He further confirmed that Luxembourg would close the regime to new entrants by 30 June 2016 and that a transitional grandfathering period would be foreseen until 30 June 2021.
Pending the introduction of the new regime, it will be important for companies that are considering to roll out a new intellectual property strategy under the existing Luxembourg tax rules to do so by 30 June 2016, i.e. before the date on which the 50bis Regime is likely to be closed to new entrants, whilst being mindful that the structure would possibly have to be revisited after 5 years.