Luxembourg Publishes Guidance On New IP Tax Breaks

11/07/2019

The Luxembourg direct tax administration has published a circular including comprehensive guidance for the recently introduced changes to the special tax regime for intellectual property income.

The Act of April 17, 2018, amending the law of December 4, 1967, concerning the tax treatment of intellectual property, was signed on April 17, 2018, and published in the Official Gazette on April 19, following approval by parliament on March 22, 2018.

The new IP box retains the 80 percent tax exemption for IP income, as under the similar regime repealed on June 30, 2016 (which is subject to grandfathering provisions), reducing the effective corporate tax rate on such income to around five percent. However, the new law alters the scope of the regime by permitting a wider variety of patents and copyrights on computer software, and excluding trademarks and designs.

Eligible income is determined by the ratio of eligible expenditure to total expenditure. Eligible expenditure includes spending on research and development activities directly related to the intellectual property. Outsourcing for research and development is permitted, provided an unrelated party is engaged.

Ineligible costs include those not directly related to the intellectual property, in addition to real estate, and interest and other financing costs, among other expenses.

The law is designed to be compatible with the "modified nexus" approach to special IP tax regimes agreed by countries under Action 5 of the OECD's base erosion and profit shifting project. This approach stipulates that a taxpayer should only be allowed to benefit from an IP regime to the extent that it can show that it itself incurred expenditures, such as on research and development, that gave rise to IP income in that territory.

The new regime is effective from January 1, 2018. Grandfathering provisions permit taxpayers to continue benefiting from the prior IP box regime until June 30, 2021. They also provide rules allowing taxpayers to elect to switch to the new IP regime within this five-year transitional period, subject to certain conditions.

Source: Pride Partners International