The new IP tax regime in Luxembourg for 2018
In recent dates, the government of Luxembourg has announced a new Intelectual Property tax regime which will be enacted in the year 2018, which aims to attract and retain research and development (R&D) activities in such country as well as foster foreign investments in Luxembourg.
We must keep in mind that this new measures need to be in line with the international standards set up by the OECD Base Erosion and Profit Shifting Plan (BEPS), particularly with Action 5 of this action plan and the new Nexus Approach regarding this type of tax regime.
BACKGROUND
Until June 2016, Luxembourg offers, under certains conditions, an IP Tax Regime which allowed taxpayers to enjoy an exemption for 80 percent of their income derived from certain kind of intellectual property rights.
After the new measures and standars agreed in the frame of the OECD BEPS Action Plan, this type of IP Regimes must be only avaliable for IP income to the extent that they are derived from an actual activity, which means that certain substance requirements need to be fulfilled, in order to align the taxation of profits with the location where the economic and reserach activities are carried out. This new standard was called the "Nexus Approach". In this way, R&D activities ans their associated qualified expenditures have to be met under certain conditions in order to enjoy the tax benefits offered by this IP Regime.
THE PROPOSAL
The announced IP Regime by the Luxemborug government tends to be in line with this new OECD approach. So that, the current rate of exemption (80 percent) will remain in place. However, the conditions and requirements regarding the eligible assets and income will suffer several changes.
1) ASSETS
The new measures will widen the set of patents and copyrights on computer software which can benefit by the preferential tax treatment. In contrary, trademarks and designs will no longer be eligible.
The eligible earnings that qualify for preferential tax treatment will be refered to net income from:
- Direct use
- Royalties derived from licenses agreements
- Income from the sale of IP rights
It must be observed that the new measures refered "net income". In consecuence, expense for the year and, if existing, prior tax losses connected to eligible IP assets will be deducted in order to determine the net amount which will qualify for the tax exemption.
2) INCOME
In determining the eligible income for this advantageous tax regime, it will be calculated in this way:
Qualify expenditures connecetd with IP assets / Total expenditures
What type of expenditures are eligible? This qualifying expenses are refered to R&D activities directly related to IP assets incurred. It must be noted that outsourcing expenditures related to R&D activities are eligible as long as sich activities are performed by unrelated parties.
Which expenses are not eligible? Among others, we can enumerate the real estate costs, interests and other financing costs, as well as expenses not directly related to eligible IP assets.
The new regime allows the eligible expenditure to be uplifted by 30 percent, as long as the eligible expenses does not exceed the overall amount of expenditure incurred by the taxpayer.
With this new measures Luxembourg aims to remain competitive and attractive to retain R&D activities and certain kind of activities related to this field, while complying with the new standars ann the Nexus Approach set up by the OECD in the framework of BEPS.
We must keep in mind that this new measures need to be in line with the international standards set up by the OECD Base Erosion and Profit Shifting Plan (BEPS), particularly with Action 5 of this action plan and the new Nexus Approach regarding this type of tax regime.
BACKGROUND
Until June 2016, Luxembourg offers, under certains conditions, an IP Tax Regime which allowed taxpayers to enjoy an exemption for 80 percent of their income derived from certain kind of intellectual property rights.
After the new measures and standars agreed in the frame of the OECD BEPS Action Plan, this type of IP Regimes must be only avaliable for IP income to the extent that they are derived from an actual activity, which means that certain substance requirements need to be fulfilled, in order to align the taxation of profits with the location where the economic and reserach activities are carried out. This new standard was called the "Nexus Approach". In this way, R&D activities ans their associated qualified expenditures have to be met under certain conditions in order to enjoy the tax benefits offered by this IP Regime.
THE PROPOSAL
The announced IP Regime by the Luxemborug government tends to be in line with this new OECD approach. So that, the current rate of exemption (80 percent) will remain in place. However, the conditions and requirements regarding the eligible assets and income will suffer several changes.
1) ASSETS
The new measures will widen the set of patents and copyrights on computer software which can benefit by the preferential tax treatment. In contrary, trademarks and designs will no longer be eligible.
The eligible earnings that qualify for preferential tax treatment will be refered to net income from:
- Direct use
- Royalties derived from licenses agreements
- Income from the sale of IP rights
It must be observed that the new measures refered "net income". In consecuence, expense for the year and, if existing, prior tax losses connected to eligible IP assets will be deducted in order to determine the net amount which will qualify for the tax exemption.
2) INCOME
In determining the eligible income for this advantageous tax regime, it will be calculated in this way:
Qualify expenditures connecetd with IP assets / Total expenditures
What type of expenditures are eligible? This qualifying expenses are refered to R&D activities directly related to IP assets incurred. It must be noted that outsourcing expenditures related to R&D activities are eligible as long as sich activities are performed by unrelated parties.
Which expenses are not eligible? Among others, we can enumerate the real estate costs, interests and other financing costs, as well as expenses not directly related to eligible IP assets.
The new regime allows the eligible expenditure to be uplifted by 30 percent, as long as the eligible expenses does not exceed the overall amount of expenditure incurred by the taxpayer.
With this new measures Luxembourg aims to remain competitive and attractive to retain R&D activities and certain kind of activities related to this field, while complying with the new standars ann the Nexus Approach set up by the OECD in the framework of BEPS.
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