Luxembourg Legislates For New IP Box Regime
Luxembourg Finance Minister Pierre Gramegna has introduced legislation into parliament that would establish a new intellectual property tax regime in Luxembourg.
The bill was submitted to the Chamber of Deputies on August 4, 2017, and is designed to be aligned 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 stipulates that a taxpayer would only be allowed to benefit from an IP regime, and its beneficial tax rates, 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The new IP box retains 80 percent tax exemption for IP income, as under the similar regime repealed on June 30, 2016 (subject to grandfathering provisions). This reduces the effective corporate tax rate on such income to around five percent.
However, the new IP box regime differs from the previous version by permitting a wider variety of patents and copyrights on computer software, while trademarks and designs are ineligible.
Eligible income will be 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 R&D 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.
If approved by parliament, it is intended that the new regime will apply from 2018.