Luxembourg - 2009 Tax Reform introduced by the Law of 16 December 2008
On 16 December 2008, the Luxembourg Parliament has passed laws to enact the attractive measures already proposed by the bills number 5924 and 5913.
The main measures introduced by these laws are as follows:
1. Abolition of capital duty as of 2009
The law has abolished the current contribution duty of 0,5% on capital contributions to Luxembourg companies.
The new favourable regime will provide:
- For a fixed registration duty of 75 Euro on (i) the incorporation of Luxembourg companies, (ii) the amendment of the articles of incorporation of Luxembourg companies and (iii) the transfer of seats to Luxembourg;
- For contributions of real estate assets to Luxembourg companies in exchange of shares: these contributions will be subject to a fixed registration duty of 0,5% and a transcription tax of 0,5%. All other contributions of real estate assets to Luxembourg companies (such as debt takeover, etc.) will be subject to a registration duty of 6% and a transcription duty of 1%.
It is important to note that the new laws also provide for the abolition of the fixed capital duty of 1,250 Euro charged to specialized investment funds (SIFs), private equity capital companies (SICARs), undertakings of collective investments (UCIs) and securitization vehicles.
2. Exemption (under certain conditions) of withholding tax on dividends paid to treaty countries (in case of corporate shareholders)
This expansion of the participation exemption regime would seriously enhance the attractiveness of Luxembourg as a jurisdiction for the repatriation of profits. Currently, most treaties signed by Luxembourg provide for a reduced rate of withholding tax (generally 5% instead of the domestic withholding tax of 15%). Practically, this would reduce the withholding tax on dividends paid by a Luxembourg company to its parent company located in a country with which Luxembourg has signed a double tax treaty to 0%. The exemption is granted if the parent companies is subject to an effective tax rate of at least 10,5% and either hold at least 10% of the shares in the Luxembourg company or if the acquisition cost for the shares is at least 1,200,000 Euro. Given that Luxembourg has a very favourable holding regime and an extensive tax treaty network, as well as being a member state of the European Union, Non EU investors and Asian investors may see Luxembourg as a platform for their European investments.
3. Decrease of the combined corporate income tax rate from 29,63% to 28,59% as of 1 January 2009
4. Broadening the scope of the IP regime introduced by the law of December 2007 (in relation to the 80% exemption on income derived from IP)
Currently, 80% of income and capital gains derived from intellectual property rights is exempt from corporate income tax. These laws would broaden the scope of the law as follows: (i) Qualifiying IP assets held by Luxembourg companies will be exempt from the net wealth tax of 0.5% and (ii) domain names are, as from tax year 2008, eligible to the 80% tax exemption on income derived from intellectual property.
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.
