Since 1 January 2008, the Luxembourg legislator has created significant tax incentives in favour of IP rights, IT-related and telecommunication services which are likely to encourage Research & Development activities and boost the establishment of IP holding and management vehicles and telecommunication operators in Luxembourg.
New Income Tax measures for IP-derived income
- The Luxembourg law of 21 December 2007 has introduced a new Section 50 bis into the Income Tax Law, providing for an exemption of 80% of the net income deriving form the exploitation of any software copyright or any patent, trademark, design or model benefits. The net income is defined as the gross revenue (usually, the royalty) diminished by the expenses in direct economic relation, including the yearly depreciations or exceptional depreciation, if any.
In other words, the result of this new legal provision is that while in Luxembourg a company income is currently taxed at the standard rate of 29,63%, the effective rate of taxation for the IP-derived income will be reduced to 5,93%.
- Moreover, an 80% exemption may also apply to the net gains realised at the occasion of the assignment of a software copyright or a patent, trademark, design or model. The gain will remain taxable up to the total amount of the expenses in direct economic relation, including any depreciation, usual or extraordinary, that have been previously deducted from the taxable income of the tax payer, during the year or any previous year.
Such measures are likely to incite taxpayers not only to register patents, trademarks or designs but also to develop strategic schemes to increase the value of their intangible assets by licensing and assigning them.
- The last set of measures relates more specifically to patents. Self-developed patents which are not licensed to third parties but which are used in-house for internal needs are subject to a deduction amounting to 80% of the income that would have been expected in case of licensing to third parties.
- All these new tax measures are subject to the main following requirements:
- The company has created or acquired the software, the patent, the trademark or the design after 31 December 2007;
- Expenses, amortizations and deductions connected with the IP income have to be capitalised in the company's tax balance sheet on the first fiscal year when the IP tax exemption is requested;
- The IP rights have not been acquired from a so-called "affiliated company". A company is considered as to be affiliated when it directly holds at least 10% of the share capital of the company which benefits from the IP right income, or when at least 10% of its share capital is directly held by the company which benefits from the IP right income, or when at least 10% of its share capital is directly held by a third company which directly holds at least 10% of the share capital of the company which benefits from the IP right income.
These new tax measures will therefore not apply to intra-group IP rights assignment or licenses.
No condition relating to the business objectives of the company is thus required.
The scope of this new tax regime is therefore broader than in any other European tax regimes, even if it does not cover copyrights on literary, musical, cinematographic or other artistic works.
European tax regimes favourable to IP development are generally limited to patents or IP rights developed in specific research areas or structures.
Moreover, commenting the new regime thus created, the Luxembourg Finance and Budget Parliamentary Commission stated that these provisions should also apply to domain names. Luxembourg tax authorities did not clarified this point but the new draft bill of budget for 2009, submitted to the Parliament (Chambre des Députés) for discussion on 1st October 2008, clearly includes the domain names into the definition of the IP rights eligible to the above-mentioned tax regime. Domain names should therefore benefit from the new tax regime from 1st January 2009.
Besides, the draft bill of budget for 2009 plans to exempt IP rights which complies with the conditions set by the new IP tax regime from net wealth tax.
Super reduced VAT rate of 3.00 % extended to TV distribution
Luxembourg generally applies a Value Added Tax (VAT) of 15%.
Moreover, since 1 January 2006, the broadcasting services of radio and TV programs, excluding adult programs but regardless of transmission means benefit from a reduced VAT rate of 3.00 %.
Until 1 January 2008, this reduced VAT rate only applied to the provision of TV and radio contents, which meant that the services provided by "tele-distributors" and "cable-operators" not bearing the editorial control of the TV or radio programs did therefore not benefit from the reduced VAT rate.
The Luxembourg law of 21 December 2007 has now specified that, as of 1st January 2008, this favourable VAT rate applies to "the reception of broadcasted TV and radio services", regardless of the transmission means. The services provided by the "tele-distributors" and cable-operator are therefore also subject to the reduced VAT rate of 3.00 %, irrespectively of whether they relate to the provision of TV or radio contents or only to the technical transmission of these contents.
The Circular of 27 December 2007 of the Administration de l'Enregistrement et des Domaines reminds that the 3.00 % VAT rate applies to fee-paying services concerning TV or radio programs broadcasted by an editor or by a distributor to an undetermined number of potential viewers or auditors (point-to-multipoint transmission) but does not apply to the downloading of music or films on computers or mobile phones (point-to-point transmission).
The above-mentioned Circular also clarifies that this reduced VAT rate does apply to the following services:
- connection to an electronic telecommunication network,
- rental of technical equipment for decoding the broadcasted programs,
- maintenance work related to these installations.
This new set of tax measures reinforces Luxembourg as a location of choice for investments in intangible assets and telecommunication services.
Luxembourg, which is already party to all major IP treaties and conventions and which is particularly aware of implementing EU directives and international agreements, indeed offers high standards of protection for IP-rights as well as high-quality technical and financial support services for IT activities which have already attracted many telecommunication actors, such as the main European satellite operator for instance.
Please do not hesitate to contact the members of our Intellectual Property, Information Technology and Media Practice Group should you need any further information concerning the above-mentioned regulations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.