The Government updated the Intellectual Property (IP) regime to comply with EU and international tax standards while preserving the country’s competitiveness. The new IP box Bill takes into account the “modified nexus” approach and, if enacted, will become effective in 2018.
What stays the same?
Eligible net income from qualifying IP rights will benefit from an 80% tax exemption. The qualifying IP rights will also enjoy a full net wealth tax exemption.
What changes?
Marketing-related IP such as trademarks and designs don’t qualify anymore as eligible IP assets. The IP box Bill identifies two main groups of IP assets to benefit from the new regime:
Inventions protected by patents, e.g. utility models, plants, and medicine for rare diseases;
Copyrighted computer software.
When it comes to qualifying expenditure, it has to be directly connected to the eligible IP rights. The IP box Bill mentions Research & Development (R&D) expenditure undertaken by taxpayers to create, develop or improve the qualifying IP rights. A 30% “uplift” will further apply to qualifying expenditure, as long as it doesn’t exceed the overall expenditure.
The amount of income eligible to benefit from the new IP box regime is calculated using the nexus ratio. As such, the proportion of eligible income benefitting from exemption must match the ratio between the qualifying expenditure and the overall expenditure. Eligible incomes include royalties, capital gains and embedded IP income from the sale of products and services, as well as judicial indemnities related to an eligible IP.
Next steps for the IP box Bill
If the Bill passes, taxpayers owning IP assets that benefitted from the former IP box regime will have a transition period until 30 June 2021.
The new IP box is meant to preserve the country’s competitiveness by boosting its Knowledge Economy. There’s a new wave of Fintech and innovation across the financial services and IT sectors, creating high-value intellectual property in the form of new products, systems, and technologies. The new IP box regime will allow Fintech companies to further transform the financial services landscape in the coming years.
What we think
Wim Piot, Tax Leader
“The Luxembourg IP box, as presented in the draft law, is in line with OECD expectations. This project encourages R&D and Fintech will undeniably take advantage of this regime. Yet, we are in favour of decreasing the corporate tax rate rather than multiplying exemption schemes.”
