The Luxembourg so-called 50bis Regime reduces the effective tax rate applicable to income from registered intellectual property and copyright protected software to approximately 5.85%. Following the OECD compromise on IP tax regimes that regime will be phased out: taxpayers eligible on 30 June 2016 will continue to benefit from this measure until 30 June 2021. There is thus still a window of opportunity to bring IP to Luxembourg and to benefit from the regime for another 5 years, especially if the migration takes place before 1 January 2016.
What is the 50bis Regime about ?
At the end of 2007, 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, Ireland, Luxembourg, the Netherlands, Spain and the UK were criticised for not requiring sufficient substantial activities and presence for the tax benefits to apply.
Therefore, a common set of rules for IP tax regimes has been elaborated at the level of the OECD in the setting of the Base Erosion and Profit Shifting (“BEPS”) initiative. These rules are laid down in the Final BEPS Report - Action 5 "Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance” and foster the so-called “nexus” approach. Following this approach the benefits under an IP tax regime are conditional on the extent of the R&D activities pursued by the beneficiaries of this regime in the country concerned. The current regimes should be closed to new participants as of 1 July 2016 and taxpayers benefitting from the current regimes before that date will be able to continue to do so until 30 June 2021.
Luxembourg 2016 Budget Act : grandfathering period and enhanced transparency
On 14 October 2015 the Minister of Finance has filed a proposal of the 2016 Budget Act with the Luxembourg Parliament. Fully in line with the BEPS rules, the 50bis Regime will be closed to new entrants by 30 June 2016. However, for taxpayers benefitting from the regime before that date a grandfathering period is foreseen: the 50bis Regime will be maintained during a transition period ending on 30 June 2021.
In order to avoid abuses this grandfathering period is limited to 31 December 2016 if eligible IP has been acquired from a related entity after 31 December 2015, unless the IP was already eligible under the 50bis regime or benefitting from a similar IP regime in another country at the time of the acquisition.
Finally, a spontaneous exchange of information will be organised. IP rights acquired or created after 6 February 2015 will lead to a spontaneous exchange of information of the identity of taxpayers involved and benefiting from the current 50bis Regime. The Luxembourg tax authorities will exchange this information with the tax authorities of the other countries at the latest three months after they received the relevant information or one year after the filing of the tax return.
What's next ?
First of all, the grandfathering arrangement under the 2016 Budget Act makes that the 50bis Regime is still one of the most interesting tax regimes for IP revenues in the Europe Union and will continue to for the next 5,5 years.
Furthermore, for undertakings that already benefit from the regime at this moment, there is no immediate need to restructure their IP holding activities. It may, however, be relevant to consider the impact of the proposed abolishment of the regime on IP that is currently being developed.
In the meanwhile several think thanks are reflecting on other advantages that IP owners could have to keep their IP portfolios in Luxembourg, such as the introduction of a flexible framework for having pledges on or liens over IP.
Finally, on 26 February 2015 the Luxembourg Minister of Finance declared in his reply to a parliamentary question that the 50bis Regime will be replaced by a new regime which would be in line with the internationally agreed “nexus” approach. However, until date the Minister of Finance did not file a law proposal in this respect yet. To be continued.