Posted on March 04, 2009 in Taxation
The Luxembourg government has introduced by a law of 21 December 2007 a new Luxembourg IP regime (“Luxembourg IP Tax Law”) that provides for a 80% tax exemption of income derived from intellectual property (“IP”) as well as capital gains realized on the disposal of such intellectual property. The aim of this law is to encourage companies to invest more in research and development and will increase the attractiveness of Luxembourg for the holding of intellectual property. We also discuss hereunder briefly the new changes to the Luxembourg IP Tax Law introduced by the Law of 19 December 2008.
II. Brief overview of the main features of the Luxembourg IP Tax Law
(a) Regime applicable to royalties (income derived from intellectual property)
The royalties received by a Luxembourg legal person or natural person as a consideration for the use of any copyright on software, any software, trade mark, design or model benefit from a 80% exemption on their net income. Net income is defined as the gross royalty income received by the legal person or individual reduced by the amount of expenses in direct connection with this income.
(b) Regime applicable to capital gains
Capital gains realized on the disposal of intellectual property (use of any copyright on software, any software, trademark, design or model) in principle benefit from a 80% exemption, subject to certain rules as set out in the Luxembourg IP Tax Law.
(c) Conditions that need to be fulfilled
(i) The IP must have been created or acquired after 31 December 2007;
(ii) The expenses in connection with the IP must be recorded as an asset in the balance sheet for the first book year for which the application of the regime is demanded;
(iii) The IP may not have been acquired from a person who is qualified as an “affiliated company”. The concept of affiliated company has been clarified by the draft law. Company X is considered as an affiliated company to company Y if :
? Company X directly holds a participation of 10% in the share capital of Y
? Company Y directly holds a participation of 10% in the capital of X;
? 10% or more of the share capital of X and Y are directly held by the same company.
III. Summary of the key advantages of the proposed new regime
? The scope of IP acquired from a third party is broad; it may include any patents, any copyrights on software, trademarks, designs, models or domain names (see hereunder under section V) (other countries such as Belgium have also introduced such regime, however the scope of IP is more limited and excludes copyright, trademarks, models and designs (see Belgian law of 27 April 2007);
? Only 20% from the net income out of IP will be taxed at 28,59% which provides an effective tax burden of roughly 5.17%;
? The IP can be developed either by the company itself or acquired from a third party;
? Income derived from IP developed by the company itself can also be deducted (for an amount of 80% of the net income it would have received from a third party for the use of the patent);
? Luxembourg companies (soparfi, etc.) can in general benefit from the extensive network of Luxembourg double tax treaties as well as from the EU directive on royalty payments (as opposed to offshore jurisdictions).
IV. Changes introduced to the Luxembourg IP Tax Law by the Law of 19 December 2008
The law of 19 December 2008 has broadened the scope of the IP regime as set out in the law of 21 December 2007. These changes are the following: (1) Qualifiying IP assets held by Luxembourg companies will be exempt from the net wealth tax of 0.5% and (2) domain names are, as from tax year 2008, eligible to the 80% tax exemption on income derived from intellectual property.
This Luxembourg IP Tax Law offers an attractive regime for the holding of intellectual property through a Luxembourg company certainly taking into account that Luxembourg has an extensive tax treaty network and that Luxembourg companies can benefit from the EU directive on royalty payments.