Luxembourg to change IP taxes: What does it mean?

Earlier this month, Luxembourg's finance minister, Pierre Gramegna, sent a bill to Parliament setting out a number of changes to how the Grand-Duchy will tax income pertaining to intellectual property.

Intellectual property (IP) refers to a company's so-called "intangible" assets, covering such things as industrial designs, software, logos or even trademarks. IP rights are meant to help companies to protect – and to profit from – their creativity and innovation.

Here's what Luxembourg's tax changes will mean ...

What is the current tax system?

In Luxembourg, since 2008, there has been an 80% tax exemption on some income and capital gains derived from IP. And from January 1, 2009, no net wealth tax was levied.

Those benefits will remain under the new rules. The scope of the assets they apply to, however, will change.

Why are the changes being made? 

Luxembourg's current IP tax regime fell foul of the Base Erosion and Profit Sharing Package (BEPS).

BEPS, headed by the Paris-based Organisation for Economic Co-operation and Development (OECD), is a framework agreement including 100 countries. 

It targets tax planning that exploits "gaps and mismatches" in rules to shift profits to low-tax or no-tax locations where a company has little or no real presence.

The OECD says such practices undermine the fairness and integrity of tax systems and give multinationals an unfair advantage over domestic companies.

“This new IP regime, along with newly introduced R&D incentives, would be beneficial for Luxembourg's economic-diversification objectives — [Deloitte]

Although the OECD has no legal authority, all of the G20 countries and the European Union's 28 member states have committed politically to BEPS. And as such, the EU proposed a set of tax transparency rules on June 21.

Luxembourg signed an agreement to comply with BEPS on June 8, although it also exercised an option that allowed it to opt out of some articles. What is more, it added restrictions to 16 of the 39 articles in the instrument.

Those restrictions ran to 71 pages.

What assets will be eligible for tax relief? 

• Patents

• Utility models: An IP right to protect inventions.

• Copyrighted software

• Plant breeders' rights: The EU has a system that grants IP rights to new plant varieties. It is similar to a patent and, once given, is valid throughout the EU. 

• Orphan drug designations: Medicines for rare diseases. About 30 million people living in the EU suffer from rare diseases, according to the European Medicines Agency. 

What assets will no longer be eligible compared with the previous tax legislation? 

Trademarks and designs

How will it be calculated?

The amount of income eligible for the preferential tax regime is based on the so-called nexus ratio: the proportion of eligible expenditure to total expenditure.

What type of income can get the tax relief? 

Royalties from granting licences and income from the sale of eligible IP assets – expenses for the year and any previous tax losses related to income generated by the IP assets will be deducted.

What counts as an eligible cost? 

All research and development costs – including those outsourced to an unconnected company – to create, develop or improve IP, excluding interest, financing, acquisition and real estate expenses.

Nor would it include costs not linked directly to the asset. 

Qualifying expenditures are also eligible for an 'uplift', or increase, of up to 30% in the total figure.

What do the experts think?

Bernard David and Thierry Bovier, partners at Deloitte Luxembourg

"Based on the draft rules, if a company incurs all of the expenditure to develop a qualifying IP asset, all income derived from the commercialisation of that IP would qualify for benefits, leading to an effective tax rate of approximately 5.2%.

"This new IP regime, along with newly introduced R&D incentives, would be beneficial for Luxembourg's economic diversification objectives."

Paloma Schwarz Martinez, associate at Luxembourg law firm Elvinger Hoss Prussen 

"The sole acquisition of a qualifying IP right is no longer sufficient to benefit from the IP regime. The R&D activity does not have to be carried out within Luxembourg (otherwise, it would be contrary to the EU fundamental freedoms). It is, therefore, debatable to what extent the IP box will contribute to more R&D in Luxembourg.

"To remain competitive, it would be desirable if Luxembourg would also introduce R&D input incentives such as tax credits and super deductions."

(Alistair Holloway, alistair.holloway@wort.lu, +352 49 93 739)