Do you want to set up a SOPARFI IP in Luxembourg?
Exceptional tax regime for IP rights and Luxembourg Holding Company
n March 22, 2018 the Luxembourg parliament voted in favor of a new legal framework for the beneficial treatment of certain IP rights, thus introduced the “New IP Tax Regime” with effect from January 1, 2018. The new legal framework, adopted through the law dated 17 April, 2018 is based on the Bill No. 7163 published on August 4, 2017.
In order to be in compliance with OECD’s Forum on Countering Harmful Tax Practices, including recommendations under the OECD/G20, Base Erosion and Profit Sharing (BEPS) Project Action 5, 2015 Final Report, the former IP regime was repealed by the law of 18 December, 2015.
The Legal Framework of the SOPARFI IP
The New IP Regime continues to provide an 80% exemption for certain income derived from qualifying IP rights and an exemption of the qualifying IP rights from the net worth tax. However, the income benefitting from 80% exemption is determined based on the “Nexus Approach”, which focuses on establishing a direct connection between the expenditures, the IP assets and the income that can benefit from the beneficial regime (‘asset-by-asset’ approach). Equally importantly, the categories of the IP rights qualifying for the IP regime have been narrowed down. The new regime is open to Luxembourg resident companies, to Luxembourg permanent establishments of foreign companies and to individuals.
Qualifying IP Assets:
The New IP Tax regime applies to the following IP assets to the extent that these have been created, developed or improved after 31 December, 2017, as a part of Research and Development activities of the taxpayer and carried out by the taxpayer himself:
2.1. Inventions that are protected in accordance with national or international provisions: patents, utility models and other IP rights that are functionally equivalent to patents, such as supplementary protection certificate for medicine or for generic medicine, an extension of a supplementary protection certificate for medicine for paediatric use, a plant breeder’s certificate, an orphan drug designation.
2.2. Software protected by an author right in accordance with national and international provisions.
The new IP Tax regime is not available anymore for domain names, trademarks and brand names, designs or models.
Such activities may be conducted in Luxembourg, or through a foreign permanent establishment as long as this is located within the “European Economic Area” (EEA) and does not benefit from the similar IP regime in its country of location. The existence of foreign R&D permanent establishment must be declared annually in the tax return.
Income qualifying for the beneficial tax treatment of the new IP Tax regime means gross income and includes the fees earned for the use or concession for use of the qualifying IP asset.
The taxpayer can also include portion of sales revenues directly linked to the eligible IP asset but which is incorporated into the sale price of the products or services, capital gains realized upon the sale of IP assets, in addition any indemnity amounts receivable in the context of an arbitrated or judicial decision concerning an eligible IP asset.
Eligible expenditure is expenditure which is solely incurred as a result of R&D activity directly connected to the eligible IP asset, undertaken either by the taxpayer itself or outsourced. In the former case, the expenditure shall be eligible if R&D activity at the permanent establishment is still operational when eligible income is realized. In the latter case, outsourced entity shall be either non related party or shall perform activity on a pure cost basis and pay all expenses on to unrelated parties.
The following expenditures are considered to be ineligible: “Acquisition costs” – the costs (directly linked to the IP asset being created or developed and reflected in the value of that IP asset) of buying or accessing other IP assets, or rights to research. 2. Any financing costs. 3. Any property-related costs. 4. Any other costs not directly linked to a specific eligible IP asset. As an exception to this rule, if the taxpayer has documentary proof, and can show a link between the costs (or a proportionate share of them) and the eligible IP, such costs can be regarded as eligible expenditure.
- Qualifying Expenditure;
- “Acquisition Costs”;
- Necessary R&D expenditure directly linked to the IP asset being created or developed, payable to any related party (and not counting as qualifying expenditure);
Application of “Nexus Ratio” and Computation of the IP Income Benefiting from the Exemption:
Qualifying Expenditure X Qualifying net IP income
Qualifying net IP income must be determined as gross eligible income minus Total Expenditure, minus any other expenditure indirectly linked to the eligible IP asset.
New IP Regime allows the eligible expenditure to be uplifted by 30%. This uplift is allowed as long as the eligible expenditure does not exceed the total amount of expenditure (thus, the nexus ratio can not exceed 1.00).
Valuation of the IP rights and General Taxation
The Expenditures and Qualifying income should be determined in such a way that arm’s length principle is at all times respected.
In order to benefit from the New IP Tax Regime, Taxpayers shall demonstrate the link between the income and expenditure, therefore they shall be able to track asset-by-asset (or groups of IP assets if a product/family-based approach is being taken), Total Expenditure, Qualifying Expenditure and Qualifying Gross Income per asset.
In Luxembourg, IP rights are not subject to net wealth tax. Also, gains made from liquidation, royalties payments or interest payments are exempt from taxation.
Investment incentives for Intellectual Property Rights in Luxembourg
Luxembourg offers a full range of custom-made investment incentives designed to give new ventures a headstart and more particularly to foster R&D and innovation.
Financial support may be granted for a funding of a specific investment and R&D projects in order to complement equity and bank financing.
QUALIFYING IP ASSETS
held by Luxembourg companies will be exempt from the net wealth tax of 0.5%
are, as from tax year 2008, eligible to the 80% tax exemption on income derived from intellectual property.
Applicable Intellectual Property Rights
The tax regime applies to the following IP rights acquired by a Luxembourg company after January 1st, 2008:
Copyrights on Software
Expert Intellectual Property Lawyers in Luxembourg
Why You Need IP Lawyers in Hance Law
Our team of Technologies & IP lawyers is very famous in Luxembourg. It combines specific legal expertise with a thorough understanding of the market our clients operate in. The team’s particular strength is its cutting edge understanding of the technical aspects which allows giving efficient legal advice to businesses that are active in or rely on technology and communications and to which IP is an essential asset.
Hance Law advises on all aspects of Luxembourg intellectual property rights including :
Patents & Technology
Brands & Trade Marks
Copyright, Database Rights & Confidential Information
Licensing & Commercial Agreements
Corporate Transactions & Financings