Law & Numbers - News Tax

LUXEMBOURG IP NEW TAX MEASURES

18.01.2008 (Luxembourg)

LUXEMBOURG NEW TAX MEASURES REGARDING IP-RELATED INVESTMENTS (Law dated 27th December)

The law dated December 27th, 2007 on direct and indirect taxation has recently materialized the objectives of the Luxembourg government to enable the Grand-Duchy to become an attractive place for investments in inovating or industrial technologies linked with intellectual properties (IP).


The new law provides for a 80% tax exemption regarding the positive net incomes realized as a remuneration for the use or the licensing of the use of IP rights on softwares, patents, marks, trademarks, domain names, drawings or models.


A. MAIN CONDITIONS

The main consequence of this measure is that IP-related incomes previously taxed in Luxembourg-city at a 29,63% rate, will now be taxed at an approximate 6% rate, if the following conditions are fulfilled:

- The IP right which generates the income shall have been created or acquired by the taxpayer after December 31st, 2007; and

- The IP right shall be effective; and

- Providing that the expenditures, depreciations and deductions for fall in value exceed the eligible incomes for a given financial year, then these expenditures, depreciations and deductions shall be added to the taxpayer’s assets and be integrated in its financial statement relating to the first financial year for which the 80% exemption does apply; and

- The IP right which generates the income shall not have been acquired from :

- a company holding a direct participation of at least 10% in the corporate capital of the taxpayer; or

- a company which 10% or more of its corporate capital is directly held by the taxpayer; or

- a company whose corporate capital is directly held at a rate of 10% or more by a company which also directly holds a direct participation of at least 10% in the corporate capital of the taxpayer.


B. TAX EXEMPTION BASIS

If the taxpayer uses a patent it has itself created, the 80% tax exemption is calculated in practice on the fictive remuneration which the taxpayer would have realized if they had licensed this right to a third party, minus the expenditures that are directly and economically linked to the income.

If the taxpayer realizes a capital gain in relation with the sale of IP rights on softwares, patents, marks, trademarks, domain names, drawings or models, then this capital gain is tax exempted at a rate of 80%. Nonetheless, the capital gain is taxable at a rate of 80% of the negative net income realized in relation with the sold IP right during the previous financial years including the financial year of the sale, providing that such negative net incomes are not compensated by the expenditures, depreciations and deductions that have been added to the taxpayer’s assets.

The law additionally puts emphasis on the fact that the tax exemption shall be refused to the taxpayer if the IP right acquisition price taken into account for the calculation of the capital gain has been reduced by a transfer of an unexpected capital gain. Consequently, the tax exemption is not allowed in case the capital gain is made on the sale of IP rights that have been acquired as reinvestments.


C. EVALUATION OF THE IP-RELATED INCOME

As a principle, the tax payer is free to use any appropriate method of evaluation for its IP assets.

Nonetheless, the capital gain realized in relation with the sale of an IP right shall be evaluated according to the normal sale price, as it would be evaluated in a sale made in normal conditions.

It has to emphasised that the taxpayer can evaluate the capital gain realized on the sale of its IP-related rights to 110% of the sum of the expenditures that have decreased its taxable basis during its previous financial year and the year of the sale, if this taxpayer is a company :

- that has less than 250 employees; and

- whose:
- annual turnover does not exceed EUR 50,000,000.- ; or

- annual balance sheet does not exceed a total amount of EUR 43,000,000.-






CONCLUSION :


The purpose of the law dated December 27th, 2007 was to make the Grand-Duchy an international center of skills in every IP matter, by strengthening the existing advantages and stimulating the research-and-development inovating activities in Luxembourg.

There is no doubt that such a measure will prompt companies and investors incorporate in Luxembourg to acquire IP rights in order to develop their economy, since the Grand-Duchy appears to be now a must for the development of every IP-related activities, at the step of their creation, of their protection, as well as of their concern.



Me Alexandre CHATEAUX
Me Bernard FELTEN
FELTEN & Associates
January 17th, 2008







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