Luxembourg’s new IP tax regime for 2018

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Following Luxembourg's 2018 budget law approval, IP owners are eagerly expecting the draft law on the new IP regime to be voted during the first trimester of 2018. If approved, the new rules are expected to apply as from 2018, so let’s have a look over the outline of this new exemption regime and how to be prepared for it!

This bill, which was initiated by the Finance Minister and drafted in collaboration with the direct contributions department, is going to redefine and specify the outlines of Luxembourg’s tax regime in favor of Intellectual Property, such as to comply with new international and European principles relating to tax. It will also make possible to provide Luxembourg with a tax environment designed to protect the Grand Duchy’s competitiveness and attractiveness.

The most significant change brought on by this bill is the addition of Article 50ter to Article 50bis - which deals with partial exemption (up to 80%) of revenue generated by certain IP rights. For new IP players, it will no longer be necessary to think in terms of the system corresponding to the abridged Article 50bis but, from now on, in terms of the Article 50ter system.

Why should there be a bill for income generated by IP?

It is agreed that Intellectual Property represents a key factor in the economic growth. In fact, it is estimated that between 2011 and 2013, the fields of activity frequently concerned with Intellectual Property rights generated 42% of the European Union’s GDP, representing a total value of 5.7 trillion euros.

Nowadays, while extending a tax concession relating to the efforts put in by any given research and development company, the intention of the government of Luxembourg is to incentivize companies to devote resources to innovation activities. This measure will achieve a direct and lasting benefit to the country’s economic growth.

What is introduced by this new regime?

Any reform will inevitably bring both welcome and unwelcome innovations. Under this bill, it will still be possible to anticipate the partial exemption of patents, utility models, additional protection certificates under a patent for certain drugs or phytopharmaceutical products and extensions of additional protection certificates in the context of a drug used for pediatric purposes. Copyrights concerning IT software have also been kept in, although the ownership of rights over them is still difficult to prove.

Furthermore, the scope of application of the new system has been extended to plant breeder’s rights and orphan drugs (e.g., drugs fulfilling public health needs for purposes of treating rare illnesses).

Accordingly, those who will be losing out under the new system will be the holders of trademark rights, design rights and domain names, now excluded from the application of a favorable tax scheme. Indeed, the new system set by Article 50ter will be open only to IP resources other than the ones of a commercial nature. Consequently, a partial exemption will no longer be available to resources relating to commercialization or marketing related activities, such as trademarks or domain names.

What are the characteristics of the scheme?

Before this new bill was introduced, there was a consultation between the finance ministers of the G20 countries with the purpose of redefining a minimum standard to enable the application of a preferential taxation scheme. Accordingly, they agreed upon the need for taxpayers to prove the existence of substantial activity in Luxembourg in order to benefit from the application of the scheme.

“Eligible expenses incurred in this country in relation to research development activities” were therefore considered the variable basis for measuring the main activity, which opens up access to the favorable tax scheme.

Accordingly, Intellectual Property assets will qualify for the benefit of the new tax regime only to the extent that they arise from research and development activity. The new bill has also envisaged a certain range of safeguards in order to ensure that research and development activity will duly take place in Luxembourg and will be beneficial to the country’s economic development. Theoretically, the new measures were designed as a retrospective feature to encourage research and development.

What is eligible for the scheme?

From a purely fiscal viewpoint, similar to the content of Article 50bis, 80% of the net (adjusted and compensated) income generated by an eligible Intellectual Property right qualifies for exemption, which includes:

• Income derived from the use or the granting of the right to use qualifying IP rights;
• Income embedded in the sales price of products or services directly related to the eligible IP asset
• Capital gains realized upon the disposal of an eligible IP right;
• Indemnities obtained in the context of on an arbitral or judicial decision directly linked to a breach of qualifying intellectual property rights.

Eligible income will be determined following deduction of total expenditures (including expenses, purchase costs and payments made to an associated company) where these are incurred in the context of research and development activities having a direct bearing upon the creation, development or improvement of an eligible Intellectual Property right (be it under subcontracting or under any other contractual arrangement).

For eligible IP assets, which are subject to a registration procedure, Section 8 of Article 50ter stipulates that the taxpayer may benefit from the tax scheme effective from the date of application of the IP right.

The reason for the latter provision is the fact that a period more than one year is likely to elapse between the date of application and the date of its eventual registration. Now, for such assets, the application date corresponds to the date of their creation. Consequently, such resources are likely to generate income even if the registration procedure is still in process and no right of protection has yet been granted. It is up to the taxpayer to provide – on an annual basis – information making it possible to establish the application date together with evidence of continuity of the registration procedure until the protection is granted or otherwise the application is withdrawn or declined.

As granted under the former Article 50bis regime, these eligible assets are exempt from wealth tax (insertion of a fresh Article 60ter).

What is the agenda?

In line with the provisions of the law of 18th December 2015 (on the State’s budget for income and expenditures for the 2016 commercial year), the provisions of the phased-out Article 50bis are still applicable to income and capital gains generated by IP rights eligible under the old regime for a transitory period which is to end on 30th June 2021, whilst the provisions of the new Article 50ter will be applicable as from the 2018 tax year.

It follows that – for this transitory period, which is to expire in 2021 – it is possible for a tax-payer to invoke either the provisions of Article 50bis or those of the new Article 50ter as applicable to the income that now benefits from his Intellectual Property rights that are eligible in the light of both of these Articles. The system will then be the subject of voting during the first trimester of 2018, and will be ready to run at the start of 2019, while the new Intellectual Property tax scheme will be applicable as from the 2018 tax year.