Why Think Luxembourg for intellectual property (IP) management rights ?
LG@vocats, October 2011
In order to promote Luxembourg as a key centre for IP management rights, tax provisions were adopted by Luxembourg’s Parliament in 2007.
It provides for an 80% tax exemption on net income derived from certain IP rights and on capital gains resulting from the disposal of such IP rights and an 80% deemed income deduction for self-developed patents. Thus, qualifying IP rights benefit from a 5.76% corporate tax (in lieu of the 28.80% standard corporate tax).
This measure is applicable in Luxembourg as of 1 January 2008.
Scope of application
The IP rights targeted by this measure are copyrights on software (other copyrights are not included), domain names, patents, trademarks, designs and models acquired after 31 December 2007.
While other countries have enacted similar measures, the Luxembourg scheme appears to be broader, as it is not limited to patents, and is not subject to making any specific research investments.
Who can benefit from these measures ?
The new regime will apply to fully taxable resident individuals carrying on a business, corporate entities, Luxembourg permanent establishments of non-resident companies and non-resident individuals carrying on a business in Luxembourg.
How does it work ?
The new regime covers three different situations:
- 80% of the net income received by a Luxembourg taxpayer (individual or company) for the use of, or the granting of the right to use, IP rights is tax exempt. The net income is determined by the gross income less all expenses that have a direct economic relationship with this income (including the annual depreciation and any write-downs having reduced the tax base of the tax payer). Hence, this will lead to an effective tax rate of 5.76% (i.e. 20% of 28.80% company tax).
- Capital gains realized on the disposal of the aforementioned IP rights will also benefit from an 80% tax exemption.
- A taxpayer who has himself registered a patent which is used in connection with his own activity is entitled to an 80% tax exemption of the net income that he would have made if he had licensed the use of this right to a third party. The net income can be defined as the fictive remuneration reduced by all expenses that have a direct economic relationship with this income including annual depreciation and any write-downs. This provision aims at promoting research activities in Luxembourg and encourage the protection of research and development discoveries via patent registrations.
The realization value that should be used for the determination of the disposal gain in transactions between parties must be the arm’s length value. If no market value is available, the estimated market value of the IP can be determined according to any frequently used method for the valuation of IP rights.
A recapture regime will apply to the capital gains arising from the disposal of IP rights in order to avoid exempting a gain where the IP rights have generated losses which have been fully deducted.
Conditions
The application of the IP exemption regime is subject to the following conditions:
- The IP right must have been acquired or developed after 1st January 2008;
- Expenses, amortization and deductions for depreciation in direct economic connection with the IP must be recorded as an asset during the first year for which the benefit of this tax regime is claimed; and
- The exemption does not apply if the IP rights have been acquired from an “associated” company. A company is considered as “associated” to another if :
- it directly holds at least 10% of the share capital of the company receiving the IP revenue;
- its share capital is held directly by at least 10% of the company receiving the IP revenue;
- at least 10% of its share capital is held by a third company which holds directly 10% of the share capital of the company receiving the IP revenue.
When such a situation occurs, a reflexion on the appropriate corporate structure might be required in order to meet this condition.
