On 27 December 27 2007, the Luxembourg government passed a law concerning the taxation of royalties earned from intellectual property (“Luxembourg IP Tax Law”). This Law exempts 80% of the net income derived from intellectual property (“IP”) as well as capital gains realized on the disposal of such intellectual property. The aim of this law is to encourage companies to invest more in research and development and will increase the attractiveness of Luxembourg for the holding of intellectual property. The law of 27 December was extended by an additional law passed on 19 December 2008.
Royalty income derived from intellectual property received by a Luxembourg legal person or natural person as a consideration for the use of any copyright on software, any software, trade mark, design, domain name or model benefit from a 80% exemption from corporate income tax on their net income. Net income is defined as the gross royalty income received by the legal person or individual reduced by the amount of expenses in direct connection with this income.
Capital gains realized on the disposal of intellectual property benefit from a 80% exemption from Corporate income tax.
Qualifying IP assets held by Luxembourg companies will be exempt from the net wealth tax of 0.5%
The granting of the exemption is subject to the following conditions:
- The IP must have been created or acquired after 31 December 2007, or domain names must have been registered after 31 December 2008.
- The expenses in connection with the IP must be recorded as an asset in the balance sheet for the first book year for which the application of the regime is demanded.
- The IP may not have been acquired from a person who is qualified as an “affiliated company”. The concept of affiliated company has been clarified by the draft law. Company X is considered as an affiliated company to company Y if :
Company X directly holds a participation of 10% in the share capital of Y
Company Y directly holds a participation of 10% in the capital of X;
10% or more of the share capital of X and Y are directly held by the same company.
KEY ADVANTAGES OF THE PROPOSED NEW REGIME
The scope of IP acquired from a third party is broad; it may include any patents, any copyrights on software, trademarks, designs, models acquired by a Luxembourg company after 31 December 2007 or domain names registered after 31 December 2008.
Only 20% from the net income out of IP royalty will be taxed at 28,59% which provides an effective tax burden of roughly 5.17%.
The IP can be developed either by the company itself or acquired from a third party.
If the company uses IP developed for itself, the company can deduct, from its commercial income 80% of the net income it would have received from a third party for the use of the IP.
Luxembourg companies subject to corporation tax (normally 28.56%) also benefit from:
The European Union Parent Subsidiary Directive reducing withholding taxes on dividends paid between European countries to zero
The European Union Royalty and Interest payments Directive reducing withholding taxes on royalty and interest payments between European countries to zero
An extensive network of double tax treaties reducing withholding taxes on dividends from 15% if paid to an offshore non-treaty country to a minimum of 5% if paid to a treaty country.