Luxembourg has announced a new regime that offers a special tax incentive for certain income from intellectual property rights.
The bill containing the new IP regime, which is expected to come into effect as of the 2018 tax year, was tabled in the Chamber of Deputies on August 4, 2017.
Until June 30, 2016, Luxembourg taxpayers could enter, under certain conditions, into the so-called IP box scheme. This scheme allowed taxpayers to enjoy an exemption for 80 percent of their income from certain intellectual property rights.
As part of the OECD / G20 BEPS Action Plan, however, countries agreed that any IP box regime offering preferential tax treatment should only be available for IP income to the extent that there are corresponding substance requirements, in order to align the taxation of profits with the place of origin of economic activities. For IP box regimes, consensus was reached to adopt the nexus approach, which considers R&D activities and their associated expenditures as pre-conditions that taxpayers need to meet in order to benefit from a specific low tax regime.
This regime has largely been outlawed following Action 5 of the OECD/G20 BEPS Action Plan because it did not require taxpayers to meet appropriate substance requirements in order to qualify for the preferential tax treatment.
Proposed IP box regime
The proposed Luxembourg IP box regime has been developed to conform with the nexus approach under the BEPS guidelines. The 80 percent exemption rate under the old rules remains unchanged (leading to an effective tax rate of approximately 5.2 percent. However, under the proposed rules, the conditions regarding eligible assets and income have been amended.
Under the proposed rules, a wider set of patents and copyrights on computer software will be eligible assets for the preferential tax treatment. On the other hand, contrary to the previous regime, trademarks and designs will no longer be eligible.
Eligible revenue that will qualify for preferential tax treatment include net income from direct use, royalties from the granting of licenses, or income from the sale, of eligible IP assets. It should be noted here that the notion of "net income" is used - thus, expenses for the year and, if applicable, prior tax losses in relation to eligible IP assets will be deducted to determine the net amount eligible for the exemption.
The proportion of net income qualifies for preferential tax treatment will be determined based on the nexus ratio, which is the proportion of eligible expenditure to total expenditure.
Eligible expenditure includes R&D expenditure directly related to eligible IP assets incurred by the taxpayer. It should be noted that outsourcing costs for R&D are eligible, as long as these activities are carried out by unrelated parties.
All costs not directly related to an eligible IP asset, as well as certain expenses, such as real estate costs, interest and other financing costs and acquisition costs of IP assets, are not eligible.
Total expenditure under the proposed rules includes eligible expenditure, acquisition costs and research expenditure outsourced to related parties.
In order to remain competitive, and in accordance with the BEPS guidelines, Luxembourg allows the eligible expenditure to be uplifted by 30 percent. This uplift is allowed as long as the eligible expenditure does not exceed the total amount of expenditure.
An interesting option
This new tax regime, together with other commercial, regulatory and tax features available in Luxembourg, provides an interesting option for taxpayers looking to onshore their intangible property in order to address concerns that may result from the BEPS guidelines.
While more constraining than the previous regime, this bill of law (if enacted) would undoubtedly offer to taxpayers new opportunities in terms of structuring their R&D activities through Luxembourg.