Intellectual property – New draft law: 80% exemption of income derived from intellectual property
Introduction
The Luxembourg government has recently introduced a draft law on 6 November 2007 that would provide for an 80% tax exemption of income derived from intellectual property (“IP”) as well as capital gains realized on the disposal of such intellectual property. The aim of this new incentive is to encourage companies to invest more in research and development and will increase the attractiveness of Luxembourg for the holding of intellectual property. It is intended that the regime is applicable as from January 2008.
Brief overview of the main changes of the proposed draft law:
Regime applicable to royalties (income derived from intellectual property)
The royalties 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 or model will benefit from an 80% exemption 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.
Regime applicable to capital gains
Capital gains realized on the disposal of intellectual property (use of any copyright on software, any software, trademark, design or model) will in principle benefit from an 80% exemption, subject to certain rules as set out in the draft law.
Conditions that need to be fulfilled
- The IP must have been created or acquired after 31 December 2007;
- 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.
Summary of the 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 or models (other countries such as Belgium have also introduced such regime, however the scope of IP is more limited and excludes copyright, trademarks, models and designs (see Belgian law of 27 April 2007);
- Only 20% from the net income out of IP will be taxed at 29,63% which provides an effective tax burden of roughly 5.9%;
- The IP can be developed either by the company itself or acquired from a third party;
- Income derived from IP developed by the company itself can also be deducted (for an amount of 80% of the net income it would have received from a third party for the use of the patent);
- Luxembourg companies (soparfi, etc.) can in general benefit from the extensive network of Luxembourg double tax treaties as well as from the EU directive on royalty payments (as opposed to offshore jurisdictions).
Conclusion
This new draft law offers an attractive regime for the holding of intellectual property through a Luxembourg company certainly taking into account that Luxembourg has an extensive tax treaty network and that Luxembourg companies can benefit from the EU directive on royalty payments.
Introduction
The Luxembourg government has recently introduced a draft law on 6 November 2007 that would provide for an 80% tax exemption of income derived from intellectual property (“IP”) as well as capital gains realized on the disposal of such intellectual property. The aim of this new incentive is to encourage companies to invest more in research and development and will increase the attractiveness of Luxembourg for the holding of intellectual property. It is intended that the regime is applicable as from January 2008.
Brief overview of the main changes of the proposed draft law:
Regime applicable to royalties (income derived from intellectual property)
The royalties 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 or model will benefit from an 80% exemption 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.
Regime applicable to capital gains
Capital gains realized on the disposal of intellectual property (use of any copyright on software, any software, trademark, design or model) will in principle benefit from an 80% exemption, subject to certain rules as set out in the draft law.
Conditions that need to be fulfilled
- The IP must have been created or acquired after 31 December 2007;
- 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.
Summary of the 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 or models (other countries such as Belgium have also introduced such regime, however the scope of IP is more limited and excludes copyright, trademarks, models and designs (see Belgian law of 27 April 2007);
- Only 20% from the net income out of IP will be taxed at 29,63% which provides an effective tax burden of roughly 5.9%;
- The IP can be developed either by the company itself or acquired from a third party;
- Income derived from IP developed by the company itself can also be deducted (for an amount of 80% of the net income it would have received from a third party for the use of the patent);
- Luxembourg companies (soparfi, etc.) can in general benefit from the extensive network of Luxembourg double tax treaties as well as from the EU directive on royalty payments (as opposed to offshore jurisdictions).
Conclusion
This new draft law offers an attractive regime for the holding of intellectual property through a Luxembourg company certainly taking into account that Luxembourg has an extensive tax treaty network and that Luxembourg companies can benefit from the EU directive on royalty payments.
