Luxembourg introduced an IP box regime on January 1 2018 to
align itself with international tax requirements and, more
specifically, Action 5 of the OECD/G20’s BEPS
The regime adopted the 'nexus approach’, under
which research and development (R&D) expenses are
considered an indicator of the activity necessary for the
taxpayer to benefit from the preferential regime.
Innovation and R&D activities are top priorities for
Luxembourg’s economic diversification strategy and
IP regime which, due to compliance with the international
standards, will help ensure global competitiveness.
The previous IP box regime was abolished on July 1 2016
because it was not in line with the nexus approach, but
transitional rules allow the old regime to be maintained for
five years, i.e. until June 30 2021. Although the two regimes
will co-exist for several years, they cannot apply
simultaneously, and a taxpayer election to apply the new regime
As was the case under the old regime, an 80% exemption from
corporate income tax and municipal business tax is available on
the net adjusted and compensated income from qualifying IP
rights and there is a full exemption from net wealth tax.
Qualifying IP rights include patents in the broad sense and
copyrighted software, provided the assets were created,
developed or improved after December 31 2007.
Qualifying income for purposes of the IP box regime is net
income, defined as gross qualifying income less annual expenses
related to the qualifying IP right. Additionally, the net
income should be:
- Adjusted: Net losses incurred during previous tax years
on the eligible IP right must be taken into account as soon
as the taxpayer is in a net positive income position
(notably, negative IP income is a broad concept); and
- Compensated: Negative adjusted qualifying net income on
an IP asset must be compensated by any other adjusted
positive qualifying net income generated by another IP asset
held by the taxpayer.
The portion of net income that can benefit from the
exemption is determined by application of the nexus ratio,
computed on a cumulative basis, which establishes a direct
relationship between the qualifying expenditure (numerator) and
the overall expenditure (denominator):
Qualifying expenditure includes all R&D expenditure
incurred by the taxpayer or an unrelated party in connection
with a qualifying IP right, as well as R&D expenditure
incurred by a permanent establishment in a European Economic
Area country under certain circumstances. A 30% uplift applies
to qualifying expenditure capped at the amount of overall
Overall expenditure comprises qualifying expenditure, IP
acquisition costs and payments made to a related party for
Documentation in line with the transfer pricing rules under
BEPS Actions 8-10 must substantiate all transactions taking
place within an intragroup context. Documentation also must
justify the tracking of the eligible expense, total expense and
eligible income in relation to each qualifying IP right.
In certain cases, the taxpayer may be able to use a
product/service-based approach where expenditure and income are
tracked and traced to products, services or families of
products/services arising from qualifying IP assets.
This article was written by Thierry Bovier, Christophe
De Sutter and Nathalie Taranti of Deloitte Luxembourg.