Luxembourg introduces a new intellectual property ("IP") tax effective as of tax year 2018.
Since 2008, Luxembourg has offered a tax incentive consisting of an 80% exemption from corporate income tax for qualifying income and capital gains derived from certain types of intellectual property assets. Moreover, from 1 January 2009, a 100% exemption from net wealth tax ("NWT") had been applied to qualifying IP rights.
Following agreement on a modified nexus approach for IP regimes at both OECD and EU level, Luxembourg decided to abolish its IP box regime as of 1 July 2016 (with a grandfathering period of five years).
As was the case in the previous regime, under the new regime, eligible income from qualifying IP assets will benefit from an 80% exemption from Luxembourg income tax, resulting in an effective tax rate of approximately 5.2%, and a full exemption from Luxembourg NWT.
Eligible IP assets
Eligible IP assets shall include:
- Utility models
- Certain supplementary protection certificates
- Copyrighted software
- Plant breeder’s rights
- Orphan drug designations
Unlike the previous regime, commercial IP assets such as trademarks and designs will no longer be eligible for the tax incentive.
Qualifying IP income
Qualifying income includes royalties, capital gains, and embedded IP income (income incorporated in the sale price of a product or service) and indemnities based on an arbitral or judiciary decision directly linked to a breach of a qualifying IP right.
Qualifying income has to be defined as net income. Expenses for the year and, if applicable, prior tax losses in relation to eligible IP assets have to be deducted to determine the net amount eligible for the exemption.
The proportion of the income, which may benefit from the 80% exemption, has to be the same as the proportion existing between the qualifying expenditures and the overall expenditures.
Qualifying expenditure includes R&D expenditure incurred by the taxpayer and directly related to eligible IP assets. In particular, these do not include acquisition costs or outsourcing costs for R&D carried out by a related enterprise.
Overall expenditure is the sum of all the expenditure that would count as qualifying expenditure if undertaken by the taxpayer itself (including acquisition costs and outsourcing costs for R&D activities carried out by related parties).
To ensure that the new regime does not penalise taxpayers excessively for acquiring IP or outsourcing R&D activities to related parties, the new regime provides for the opportunity to apply a 30% uplift to expenditure classified as qualifying expenditure.
Therefore, the qualifying IP income must be calculated as follows:
To determine the nexus ratio and the net eligible income, taxpayers will have to track income and expenditure and provide evidence of this to the tax authorities.