How the repeal of the IP Tax Regime and introduction
of the EU anti-hybrid and anti-abuse provisions will affect the attractiveness
of Luxembourg in the international arena, especially with regards to the
similar existing tax schemes in other EU Members States?
This concern was raised because the well known Luxembourg IP tax regime that provides
for the 80% exemption on income of certain intellectual property (“IP”) rights will be abolished from 1 July 2016 for corporate
income tax/municipal business tax, and as from 1 January 2017 for net wealth
Such favorable regime was amended in order to comply
with the "Modified nexus approach for IP regimes" agreed by all DECO
and G20 Countries on 5 February 2015.
There is a transition period, however, till 30 June
2021 for tax payers already benefitting from the IP tax regime and, under
certain conditions, for IP assets newly acquired after 1 January 2016.
One more nice ‘novelty’ in the Luxemburg IP tax regime
is spontaneous exchange of information
by the Luxembourg Tax authorities
with competent authorities of foreign countries regarding the identity of the taxpayers benefitting from
the current IP regime.
Even though the amendments were introduced in order to
comply with OECD recommendation set out
in BEPS action 5 the new law does not contain any provisions that are in
line with the “nexus” approach. The nexus approach was designed to require a
link between expenditure, IP assets and IP income, and taxpayers must track
expenditure and income to IP assets in order to take advantage of the regime.
Thus, in the nearest future it will be more difficult for MNE’s to benefit from only 6% effective
tax rate for income (royalties) derived from IPRs in Luxemburg.
Moreover, the new anti-hybrid
instruments and general anti-abuse
amending the Parent-Subsidiary Directive (Directive) were implemented into Luxemburg legislation by the Law of 18
December 2015.The changes mean that
as of 1 January 2016 the following principles will take effect:
(1) Impossibility to take
advantage of the hybrid entities and hybrid arrangement.
This happens when a hybrid arrangement is treated as
debt in the source state and thus generating deductible interest and as equity
in the recipient state that results in non taxation at the level of recipient.
Under the new provision if profit
received by the Luxemburg entity was deductible
at the level of subsidiary
(the source country) the profit will no
longer be exempt in Luxembourg
(2) Introduction into national
similar to those set forth in the Directive aimed at prevention of any abuse of the Directive
In other words, if the main purpose of the transition is obtaining a tax
advantage that defeats the purposes of the Directive and there are no any valid
commercial reasons for the transaction the one may not benefit from the favorable
tax regime provided by the Directive.
At the same time it should be noted that as for now, distributions
made by or to eligible companies located outside the EU are not subjects to
those new measures.
However, considering the global trends aimed at combustion
with harmful tax planning that are reflected
in BEPS action plan it is likely that in the future similar measures will be
introduced for companies located in OECD Member States and a new IP regime which
will be based on the modified “nexus” approach will be implemented in
Luxemburg. This means that the main
criteria for obtaining benefit will be a
substantial activity requirement of
the company that will have to show a
direct connection between the income, receiving benefits and the activity
contributing to that income.