On 14 October 2015, the Luxembourg Minister of Finance presented a bill to Parliament on the state budget for 2016. This bill contains several proposals affecting corporate taxpayers. One of the main proposals is the abolition of the intellectual property regime.
Similar tax relief systems, known as "IP box" or "Patent box", were set up by around 10 EU Member States which, being more and more competitive to attract companies to their territory, have alerted the OECD. The abolishment of the Luxembourg IP box regime is thus a logical continuation of the OECD's actions aimed at preventing harmful tax practices, materialized in the Base Erosion and Profit Shifting (BEPS) action plan.
Further to the discussions at the international level, it was agreed that IP regimes must comply with the new modified nexus approach. This approach means there must be a direct nexus between the income receiving benefits and the activity contributing to that income.
As the current Luxembourg IP box regime is not in line with such an approach, Luxembourg Minister of Finance proposed to abolish it as of 1 July 2016 for corporate income tax and municipal business tax purposes (and 1 January 2017 for net wealth tax purposes). The abolishment of the Luxembourg IP box regime will however be progressive, i.e., the existing regime will be maintained until 30 June 2021.
In practical terms this means that taxpayers currently benefiting from the IP regime may continue to do so until 30 June 2021, but special rules exist for new entrants. They may be admitted to the Luxembourg IP box regime up to 1 July 2016, and benefit from such regime until 30 June 2021, provided that the qualifying IP rights were:
- created or acquired from unrelated parties or improvements were made to such rights before 1 July 2016;
- acquired directly or indirectly from a related entity before 31 December 2015;
- acquired directly or indirectly from a related entity after 31 December 2015 but before 1 July 2016 and such IP rights were eligible at the time of their acquisition for the Luxembourg IP box regime or a foreign IP regime corresponding to the Luxembourg one.
In its drive toward transparency, Luxembourg should also adopt an additional measure concerning the IP regime. It was proposed in the draft law to introduce an automatic exchange of information on the identity of the taxpayers benefiting from the IP regime on rights created or acquired after 6 February 2015. Such exchange should be possible under the existing domestic legislation or provisions of a relevant tax treaty.
As the original announcement from the Luxembourg government was to modify the regime, we can anticipate that this abolition will, at some point, be followed by the introduction of a new BEPS compliant regime.