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.
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
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 BEPS
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
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
By Bernard David and Thierry Bovier, Deloitte