On 22 March 2018, the Luxembourg Chamber of Deputies adopted the new intellectual property box regime with effect from 1 January 2018 and which includes article 50ter of the Luxembourg income tax law (The “LITL”). This vote of the Chamber of Deputies was materialized by the law of 17 April 2018 which was published in official journal (Memorial A) on 19 April 2018 (the “IP Box Law”).
The new IP Box Law replaces the previous IP Box regime which was abolished by the law of 18 December 2015. In this respect, article 50bis LITL of the previous IP Box regime was closed to new taxpayer owning IP assets with effect from 30 June 2016. Nevertheless, previously-qualifying IP assets can continue to benefit from the old regime during until 30 June 2021.
The new IP Box Law is in line with the provisions of the bill n°7163 tabled in the Chamber of Deputies on 4 August 2017 (see our previous newsletter dated 30 October 2017). Indeed, only one amendment has been adopted to comply with the modified nexus approach of BEPS Action 5. This amendment is based upon the definition of qualifying expenditures for the determination of net eligible income which will be developed hereinafter.
The new article 50ter LITL will allow a Luxembourg resident company, a Luxembourg permanent establishment of a foreign company or an individual to benefit from a partial exemption of 80% on the net income derived from eligible IP assets as well as a 100% exemption from net wealth tax. Therefore, for a corporate taxpayer based in Luxembourg city with eligible net income, the new IP Box Law leads to an effective tax rate of 5,202% in accordance with the rate of the corporate income tax applicable as from 2018 (19,26%) and municipal business tax in Luxembourg city (6,75%) for companies with a registered office in Luxembourg city.
I.The eligible IP assets
The new IP Box regime highlights several eligible assets which may benefit from the preferential tax regime. The new IP Box Law underlines that only IP assetswhich are not of commercial nature, may qualify. The new IP Box Law 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.
Thus, 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 new IP Box Law provides that the above-mentioned assets are eligible for the preferential tax regime only if they result from an research and development (“R&D”) activity performed by the taxpayers themselves.
It is also specified that the assets in question must have been created, developed or improved after 31 December 2007, as part of the R&D activities of the taxpayer carried out by the taxpayer itself. Under the new IP Box Law, such activities may be carried out in Luxembourg, or through a foreign permanent establishment as long as this is located within the European Economic Area (the“EEA”) and does not benefit from a similar IP regime in its country of location. The existence of a foreign R&D permanent establishment must be declared annually in the tax return.
II. Qualifying R&D expenditures
The expenditures eligible for the exemption provided for by the new IP Box Law, 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.
With regard to the amendment of the bill n°7163, it is stated that qualifying R&D expenditures only include those incurred by the permanent establishment of the taxpayer provided that:
- the permanent establishment is located in the EEA; and
- the expenditures are attributable to the Luxembourg taxpayer by virtue of an applicable double tax treaty.
This scenario should occur when:
the R&D expenditures incurred by a permanent establishment located in the EEA are allocated to it on the basis of a double tax treaty between the other EEA State in which the permanent establishment is located and Luxembourg; and
the R&D expendures are directly related to the constitution, development or improvement of an eligible asset imputed to it, which will be the case if :
- the taxpayer execices and controls all essential functions related to R&D activities (i.e. the functions related to the development, improvement, maintenance, protection and exploitation) carried out by the permanent establishment and having generated the expenses; and
- the taxpayer assumes all the risks associated with those functions.
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.
III. Eligible income
In addition to the fees earned for the use or concession for use of the eligible IP asset, the IP Box Law 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.
According to the IP Box Law, the total expenditure that must also be calculated corresponds to the total amount of the following cost:
- the sum of the above-mentioned qualifying R&D expenditures developed in part III; plus
- the acquisition costs; plus
- 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 LITL).
The IP Box regime adds that total expenditures must be taken into account when they are incurred, regardless of their accounting or tax treatment.
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.