Luxembourg: New BEPS-compliant IP regime to open up opportunities
International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Luxembourg: New BEPS-compliant IP regime to open up opportunities

Luxembourg bridge large

Luxembourg has released draft legislation on its intellectual property (IP) box regime that could offer more benefits to companies’ R&D activities.

david-bernard.jpg
bovier-thierry.jpg

Bernard David

Thierry Bovier,

Luxembourg taxpayers had until June 30 2016 to benefit from the IP box regime that provided for an 80% exemption on income derived from certain IP rights. Because the IP box regime was not in line with the requirements of the OECD final report on Action 5 of the BEPS Project, it had to be abolished (subject to some transition rules).

The long-awaited draft bill on the new IP regime was issued on August 4 2017.

Proposed regime

The proposed rules will provide an 80% exemption on income derived from the commercialisation of certain IP rights, as well as a 100% exemption from net wealth tax.

Qualifying assets under the proposed law would include patents (broadly defined) and copyrights on software. Trademarks, designs and models are excluded, however. Qualifying income would include royalties, capital gains and embedded IP income from the sale of products or services directly related to the qualifying IP asset. The regime would apply on a net income basis, meaning that annual costs relating to the IP, as well as previous tax losses relating to the IP, would have to be deducted from the gross income.

The nexus ratio, the cornerstone of the new regime, would determine the proportion of net income entitled to the benefits under the new rules based on the ratio of qualifying expenditure and overall expenditure. Qualifying expenditure would include all research and development (R&D) expenditure incurred by the taxpayer for the creation, development or improvement of qualifying IP rights. It would not include interest and financing charges, the costs of acquisition of the IP, real estate costs or costs that cannot be linked directly to the eligible IP asset. The outsourcing of R&D would be permitted and included in qualifying expenditures provided it was carried out by unrelated parties. Overall expenditure would be the sum of qualifying expenditure, IP acquisition costs and outsourcing costs to related parties.

The nexus ratio and the net qualifying income would be cumulative and the taxpayer would be required to track income and expenditure by IP asset, group of IP assets or, alternatively, products or services arising from IP assets.

To remain competitive, Luxembourg would allow the 30% uplift on qualifying expenditure.

Finally, in an intragroup context, all transactions would have to be properly priced and documented according to the new transfer pricing guidelines deriving from BEPSActions 8-10.

Comments

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. We hope that it will be further enhanced after a first assessment period to include all options offered by BEPS Action 5 (e.g. third category of IP for SMEs) and offer more flexibility with regard to the organisation of R&D activities within a group of companies. 

By Bernard David and Thierry Bovier, Deloitte Luxembourg.

more across site & bottom lb ros

More from across our site

Despite the relief, Brazil’s government has also presented a bill which seeks to re-impose a tax burden on companies’ payroll, one local tax specialist told ITR
Jeremy Brown arrives at the firm after a near 16-year career with Deloitte
PwC could elect a woman into the senior leadership position for the first time; in other news, KPMG Australia has extended its CEO’s term
The Senate report into PwC’s scandal is titled ‘The cover up worsens the crime’
Law firms that are conscious of their role in society are more likely to win work, according to a survey of over 23,000 in-house professionals
The firm’s tax business generated a quarter of HLB’s overall revenues in 2023
While successful pillar two implementation will require collaboration across all units, a combination of internal and external tax advice is at the centre of the effort
Binance has also been accused of manipulating foreign exchange rates via currency speculation and rate-fixing
Six individuals should have raised questions over information they received but did not breach professional standards, according to the firm
The partnership of KPMG UK has installed Holt for a second term as CEO and senior partner; in other news, a Baker McKenzie partner has sued the IRS
Gift this article