IP activities in Luxembourg

02 April 2015
Lucie Piovan
M&A Property Investors Communication & PR Officer
Since January 1 2008 Luxembourg has offered a very favorable tax regime for royalty income and relating capital gains and exempts 80% of qualifying income, resulting in an effective tax rate of 5.72%. The rules can be summarized as follows: 
   • 80% exemption on royalties and capital gain from certain IP 
   • The 80% exemption is applicable to certain type of IP rights including patents, trademarks/service marks, design/models, internet domain names and software copyrights relating to standard software. However, copyrights of literary or artistic work, plans, secret formulae and processes remain outside the scope of the new IP regime. 
   • This 80% exemption applies to the net positive income (gross revenue from the IP less directly connected expenses, depreciations and write-downs).

In case of disposal of the IP, 80% of the capital gains realised on this transfer are exempt from tax. For this purpose, a recapture system is foreseen. The reduced basis for the computation of the capital gains (20% of the gain) will be increased by 80% of the net negative result derived from the IP rights incurred during the tax year of disposal or any previous year, provided that such negative result has not been offset as a result of its capitalisation. 

   • 80% deemed income deduction for selfdeveloped patents 
   • The law provides for an 80% deemed income deduction for self-developed patents that are used by the taxpayer himself. This notional deduction is calculated in terms of what the arm’s length patent royalty would have been had such a patent been licensed to a third party. 
   • The law also applies to qualifying IP that has not yet been patented but for which the process has been started. However, when an application is denied, deductions affected during the application process must be addedto the taxable income of the year of denial. 

In order to benefit from the new IP tax regime, the following conditions must be simultaneously met: 
   • The IP right must have been acquired or developed after December 31 2007; 
   • The IP right may not have been acquired from specified “directly” related companies, and 
   • Expenses, amortisations and writedowns economically related to the IP must be activated, if these exceed qualifying IP income in a given year. The burden of proof is on the taxpayer for the fulfillment of the cumulative conditions. Finally, it is important to note that IP assets qualifying for article 50 bis Luxembourg Income Tax Law are exempt from net wealth tax based on article 60 bis BewG (Bewertungsgezetz).