New Luxembourg Patent Box

Since the introduction of a law dated 21st December, 2007, a privileged Luxembourg tax regime exists for income and capital gains in relation to certain IP rights by the insertion of a new article 50bis in Luxembourg’s income tax law, the IP box.

Under the IP box, Luxembourg taxpayers are entitled, subject to certain conditions, to benefit from an exemption of up to 80% on the net income derived from and capital gains realized on patents, trademarks, designs and models, domain name rights as well as from copyrights on software. In the case of a Luxembourg corporation having its registered office in Luxembourg City that falls within the IP box provisions, this would involve an effective taxation of the income at a rate of just 5.56% in 2017.

In line with the base erosion and profit shifting (BEPS) action plan as well as arrangements between OECD and EU countries, a law introduced on 18th December, 2015 abrogated the IP box and article 50bis with effect from 1st July, 2016. At the same time, the law introduced a transitory period from 1st July, 2016 to 30th June, 2021, during which time the IP box continues to apply to IP rights which benefited from the tax regime as of 30th June, 2016.

On 26th April, 2017, the Luxembourg Prime Minister Xavier Bettel announced the entering into force in 2018 of a new privileged Luxembourg tax regime for income deriving exclusively from patents, the patent box. Xavier Bettel did not provide any details in his announcement. However, it seems clear that the patent box will have to comply with the framework defined by the BEPS Action 5 report and, accordingly, certain educated predictions can be given.

In this respect, it is likely that the patent box will only apply to technical or scientific innovations that benefit from patent protection (so that trademarks, designs and models, domain name rights as well as copyrights may be excluded from the patent box).

Moreover, the taxpayer may be required to have incurred a significant proportion of the R&D costs and expenses, and part of the R&D activities should have been carried out in Luxembourg.

An important point to clarify is the tax incentive attached to the patent box. In order to place Luxembourg as an international hub for research and technology, it may be surmised that the Luxembourg Government will make the tax incentive as attractive as possible.

Finally, the IP box and the patent box will probably co-exist during the years 2018 to 2021. Thereafter, it is possible that patents which have benefited from the IP box will be eligible for the patent box.