Application of Article 50 bis LITL to IP rights acquired in exchange of shares

On June 16th 2015, the Administrative Court (Tribunal Administratif) (the “Court”) took a decision on the application of the provisions of Article 50 Bis of the Luxembourg Income Tax Law (“LITL”).

In the case at hand, a Luxembourg permanent establishment of a UK company was contributed to a newly created Luxembourg company (“Tax Payer”) in exchange for newly issued shares of the Tax Payer. The main assets of the permanent establishment were trademarks, patents, patterns and domain names (the “IP rights”). The Tax Payer acquired these assets at their book value in application of Article 172§4 LITL.

Pursuant to Article 170§5 and 172§4 LITL, the Tax Payer acquired the IP rights from the UK company in tax neutrality and recorded them at their historical acquisition cost. The tax authorities denied the application of Article 50 Bis LITL to the income derived from the IPs on the ground that the IP rights were acquired from a related company. Since the Tax Payer booked the IP rights at their historical acquisition price, the tax authorities considered that the condition prescribed in Article 50 Bis LITL that the IP rights shall not be acquired from a related party, had to be examined on the date of the initial acquisition by the UK Company. Since the IP rights were acquired by the UK company from a sister company, the tax authorities concluded that the IP rights had been acquired from a related company and that the condition of Article 50bis §5 LITL was not met.

The Court held that the legal fiction provided by Article 170§5 LITL which allows the transfer of assets in tax neutrality if the transferee records the assets at their historical acquisition price, is of strict interpretation and is therefore limited to the acquisition date of the assets transferred.

Any other elements of the initial acquisition such as the contracting parties or their shareholding relationship is irrelevant for the application of Article 170§5 LITL.

"The Court concluded therefore that in case of transfer of IP rights in tax neutrality, the condition relating to the shareholding relationship between the parties set forth in Article 50§5 LITL shall not be analysed at the time of the initial transaction but immediately before the contribution."