Intellectual property (hereinafter "IP") is a key factor in economic growth. In this respect, draft law n°7163 was tabled on 4 August (hereinafter "Project").
As part of the OECD and G20 BEPS Action Plan, countries agreed that any preferential regime should meet the requirement of substantial activity in order to realign taxation of profits with the origin of economic activities. Regarding IP regimes, consensus on the "nexus approach" was reached, an approach that considers research and development (hereinafter "R&D") expenditures to be indicative of the activity needed to enable a taxpayer to benefit from these regimes to the extent and proportion of R&D expenditures that generate IP revenues.
Luxembourg had to change its legal framework for IP since its former regime was not in line with the internationally agreed upon approach.
Although, and similarly to the previous regime, the eligible net income from qualifying IP regimes will still benefit from an 80% tax exemption, the new approach shows evolution in terms of eligible assets, the income derived from such assets and the expenditures connected to such assets.
The income and gains qualifying for the 80% income tax exemption will equal the net eligible income (adjusted and compensated) from eligible assets multiplied by a ratio. This ratio equals the qualifying R&D expenditures over the total R&D expenditures.
The eligible assets
The Project highlights several eligible assets which may benefit from the preferential tax regime. The Project provides that only IP assets, other than IP assets of a commercial nature, may qualify for the new regime. The Project limits the benefits of the IP regime to the following assets:
- Utility models,
- Copyrights on computer software,
- Supplementary protection certificates for medicinal and plant-protection products,
- Orphan drug designations and
- Extensions of supplementary protection certificates for paediatric medicine.
IP assets that have a marketing nature are now excluded from the scope of this new regime. This mainly concerns trademarks or domain names.
The Project mentions that the above-mentioned assets are eligible for IP regime only if they result from an R&D activity performed by the taxpayer themselves.
It is also specified that the assets in question must have been created, developed or improved in such a framework after December 31, 2007.
The income derived from these assets
The Project specifies the types of income which may be taken into consideration for partial exemption:
- remuneration for the use, or the granting of the use, of an eligible asset (royalties),
- income in relation to the eligible asset that is included in the sale price of a product or service,
- income arising due to the disposal of the eligible asset and
- indemnities obtained in connection with a judicial or arbitration proceeding relating to the eligible asset.
Qualifying R&D expenditures
The expenditure eligible for the exemption, provided for by the Project, shall only be the expenditure necessary for R&D activities directly related to the constitution, development or improvement of an eligible asset that is made by the taxpayer for R&D activities carried out by the taxpayer or for payments made by the taxpayer to an entity other than a related entity.
The costs must be incurred within the framework of an R&D activity undertaken by the taxpayer themselves, directly or through a permanent establishment located in the European Economic Area (hereafter “EEA”), or paid to unrelated outsourcing parties.
All costs not directly related to an eligible IP asset, as well as certain expenses such as real estate costs, interest, financing costs and acquisition costs of IP assets are not eligible expenses.
Luxembourg will allow a 30% increase of these qualifying R&D expenditures, up to the total amount of the overall R&D expenditures.
Total R&D expenditures
According to the Project, the total expenditure corresponds to the sum of the above-mentioned eligible costs plus the acquisition costs and the expenditure necessary for R&D activities directly related to the constitution, development or improvement of that eligible IP, that are made to a related business (i.e., an enterprise referred to in Article 56 of the Income Tax Law). The Project adds that total expenditures must be taken into account when they are incurred, regardless of their accounting or tax treatment.
For eligible assets subject to a registration procedure, the taxpayer may benefit from the tax treatment of IP from the filing date of the application for registration. The latter must, if necessary, provide the Tax Administration with all the supporting documents in order to establish the link between the expenses incurred, the eligible asset and the eligible income, knowing that the non-observance of this obligation will exclude the taxpayer from benefiting from the regime, provided for by the Project, for the reference period of non-compliance.
Finally, with regard to the application of the provisions of Article 50bis of the Income Tax Law currently in force, they shall continue to apply to income and capital gains, on the rights referred to therein, during a transitional period ending on 30 June 2021, whereas the provisions of the new Article 50ter shall apply from 1st January 2018. During the transition phase, the application of Article 50bis (an option that is subject to specific conditions) or Article 50ter may be made at the choice of the taxpayer, with such a choice being irrevocable.
Based on BEPS developments, it is not expected that the Luxembourg IP Box regime will be substantially different than the other IP Box regimes across Europe. A difference can be found in details such as the consideration of expenditures generated in EEA countries.