The Luxembourg tax regime aims at encouraging Intellectual Property (IP) companies to invest in intellectual property and research and development (R&D) through an effective tax rate on IP income of around 5%. The attractive IP tax regime available for a Luxembourg IP companies is now applicable to following IP rights:
These assets should have been acquired or created after 31 December 2007. There is no minimum holding period.
The Intellectual Property Right tax regime : (Article 50bis and the new 50ter Luxembourg Tax Code)
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Exemption of 80% of the net profit derived from the royalties received by the Luxembourg IP company on its IP rights;
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Exemption of 80% of the net capital gain realised upon disposal of these IP rights by the Luxembourg IP company;
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100% exemption from wealth tax on the IP rights value held by the Luxembourg IP company;
If the Luxembourg IP company has developed the IP rights itself, then it allows a deduction equal to 80% of a deemed income of the IP Rights used by the Luxembourg IP company.
The new IP tax regime available for a Luxembourg IP companies is now mostly applicable to the following IP rights:
The Luxembourg IP company
The IP company can be set up in any form existing under Luxembourg company law. Investors, promoters, authors and IP developers often choose the S.à r.l or the S.A. (with a minimum capital of 12.000 or 30.000 Euro).
The IP rights may be purchased or acquired by a contribution in kind from the company's shareholder.
There is no restriction on the nationality, residence or domicile status of the shareholder in a Luxembourg IP company. They may be a corporate or private individual.
Incentives offered by Luxembourg as one of the most attractive frameworks for R&D in Europe
As well as the specific IP tax exemptions noted above, Luxembourg IP companies, private research SPVs, R&D companies, and Funds, etc., also benefit from a range of incentives including R&D project funding of 25% to 100% (generally being subsidies or interest-rate subsidies).
Luxembourg is therefore ideally located in the heart of Europe for the incorporation of Intellectual Property Rights’ companies.
A new IP regime to comply with the Nexus Approach is available in Luxembourg
The Article 50ter allows a taxpayer to benefit from an IP regime (exemption at 80pc of income derived from IP) to the extent that the taxpayer itself incurred qualifying research and development (“R&D”) expenditures that gave rise to the IP income.
This is inline with the “OECD”’s document released on 6 February 2015 “Action 5: agreement on Modified Nexus Approach for IP Regimes”.
Creatrust , for trust, communication and confidence
Creatrust can provide you with guidance and knowledge to help you take full advantage of the favourable legal, taxation and regulatory frameworks available in the Grand Duchy.
Our specialists draw on in-depth, in-house knowhow to help you ensure that your intellectual property, and all circumstances, are fully considered and thereby structured to your best advantage.
Creatrust will help to identify the key IP issues in your business, company or group; provide guidance on appropriate legal and tax structuring; inform you of all relevant licensing, cost-sharing and research and development variables; while also providing tried and tested advice on IP flows, financing, transfer pricing, and more.
In addition to offering advisory services, Creatrust provides corporate services for clients; from the creation of an IP company, fund or start-up established in Luxembourg to the administration and management of the structure.
IP Company: Case Studies
Case Study A: Intellectual Property Rights
A foreign investor (being a company or a private individual) has developed or owns an IP Right, copyright on a software for example. He contributes this IP Right into a Luxembourg company. Generally the said company will be a Société à Responsabilité Limitée (S.à r.l) and no preliminary external valuation needs to be carried prior to incorporation.
The Luxembourg Company will be able to:
- acquire the software’s rights for 800 Euros (which will be amortised over 10 years);
- receive royalties of 200 Euros per year
Plus there will be associated legal and development costs for 20 Euros per year.
The tax situation of the Luxembourg IP company will become:
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Royalties received
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200
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Amortization over 10 years
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-80
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purchase price of 800 over 10 years
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Costs associated with the IP rights
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-20
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legal and other developments
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Gross Profits
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100
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IP tax regime exemption
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-80
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(100 x 80%) Art 50bis
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Taxable income
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20
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Corporate Income Tax
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-5,84
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20 @ 29,22% (Luxembourg city)
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Net Profit LuxGaap
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94,14
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Therefore, the net income of 200 Euros would be taxed at a rate of 5,84% = 2,92% as at 2015.
Case Study B: Nexus Approach
In the current regime, a IP company can develop its IP, or acquire it from a third-party company, or have it develop by a subcontracting company.Nexus reduces benefits in the two last cases. So, just imagine…
Case 1: Current IP box regime
An IP Company creates its IP with its own researchers for EUR 1.000.000 (employee, material, legal costs, …). Then the company receives royalties for an amount of EUR 2.000.000 over the next years. The total amount is supposed to benefit from the tax exemption of 80% (EUR 2.000.000). The effective tax rate is then :
Case 2: Nexus approach
An IP Company creates its IP with its own researchers for EUR 250.000 (employee, material, legal costs, …). But must rely on a third party company for an amount of EUR 750.000 EUR for adjustments and other researches. This makes a total investment in the IP development of EUR 1.000.000 (250 000 + 750 000). Then the company receives royalties for an amount of EUR 2.000.000 over the next years.
The “external part” of the development should be pro-rated to benefit from the tax exemption of 80% (2.000.000):
Case 3: Nexus approach following BEPS 5
An IP Company creates its IP with its own researchers for EUR 250.000 (employee, material, legal costs, …). But must rely on a third party company for an amount of EUR 750.000 for adjustments and other researches. This makes a total investment in the IP development of EUR 1.000.000 (250 000 + 750 000). Then the company receives royalties for an amount of EUR 2.000.000 over the next years. With the latest BEPS 5 agreements, it is allowed to increase the “qualified expenditures” by 30%.
The “external part” of the development of the IP should be pro-rated to benefit from the tax exemption of 80% (2.000.000):
NB. This is a simplified example which still need to be validated by a law and that should undergo some eventual changes. It is therefore important that the part related to costs incurred for the creation of the IP is realised by the company itself and not outsourced to (group or external) entities.
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