On 7 August 2017, a bill of law proposing the introduction of a new Luxembourg intellectual property (IP) tax regime was published.
Under the proposal, up to 80% of the net income and capital gains derived from specific protected IP assets would be exempt from corporate income tax and municipal business tax, and these eligible IP assets would be fully exempt from net wealth tax. IP assets with a marketing nature (e.g. trademarks, domain names, designs and models) are excluded from the scope of the proposed regime. The Luxembourg government intends to guide the proposal through Parliament still this year, with an entry into force scheduled for 1 January 2018.
In order to be compliant with OECD BEPS Action 5, which requires substantial activity for any preferential regime, Luxembourg phased out its previous IP tax regime with a five-year grandfathering period ending on 30 June 2021 (see our tax flash of 15 October 2015). Where the IP assets still benefit from the former IP tax regime, but could also qualify under the new IP tax regime, the taxpayer will have to choose which regime to apply until 30 June 2021.
The income and gains qualifying for the 80% income tax exemption would equal the Net Eligible Income (subject to certain specific adjustments) from Eligible Assets multiplied by a specific ratio. The ratio equals the Eligible Costs (with an uplift of 30% but capped at the Total Costs) over the Total Costs. This ratio implements the modified nexus approach, meaning that only the R&D activities having a nexus with the Luxembourg taxpayer benefit from the IP tax regime. The key parameters for the IP tax regime are as follows.
- Eligible Assets: (i) patents, (ii) utility models, (iii) complementary protection certificates for patents for medicine and plant protection products, (iv) extensions of a complementary protection certificate for paediatric medicines, (v) plant variety certificates, (vi) orphan drug designations and (vii) software protected by copyrights. Eligible Assets must have been constituted, developed or improved after 31 December 2007. The filing date for registration is decisive.
- Net Eligible Income: royalties, income embedded in sold products or services, capital gains and certain indemnities, all in relation to Eligible Assets, minus all costs directly and indirectly linked to Eligible Assets.
- Eligible Costs: the costs (excluding acquisition of Eligible Assets, financing and real estate costs) in direct relation to R&D for the constitution, development or improvement of an Eligible Asset conducted by the taxpayer (including its permanent establishment located in the EEA) or outsourced to third parties.
- Total Costs: Eligible Costs plus acquisition costs of an Eligible Asset and costs of R&D outsourced to related parties in relation to an Eligible Asset.
The IP tax regime should in principle be applied on an IP-asset-per-IP-asset basis. In case of multiple IP assets and complex R&D activities a product-based approach could be applied for the purpose of the allocation.
The proposed new IP regime reflects the efforts of the Luxembourg government to boost R&D activities and expenditure in Luxembourg within the limitations of the OECD BEPS Action Plan, and comes on top of the introduction in May 2017 of a series of measures providing financial and logistic support to R&D activities.