All About Luxembourg's New Intellectual Property Regime

Luxembourg has recently enacted a new intellectual property (IP) regime in line with the OECD recommendations for more tax transparency, and in June an administrative circular was issued to help clarify this regime. The new IP regime aims to promote R&D activities largely performed in Luxembourg and offers, to Luxembourg taxpayers, an 80% tax exemption on eligible net income derived from qualifying IP.

The circular (available here) is very welcome, given the complexity of the new IP regime. It brings explanations and clarifications on R&D qualifying expenditures, several numerical examples, and guidance on where the former and new IP regimes intersect.

Read on for an overview of key points and remaining questions.

Key points on scope

The circular provides a clear definition of each eligible asset and the conditions under which it needs to be licensed and protected at national, European and international levels, as well as to which extent "improved" assets can be qualified as eligible. It confirms through those definitions that software does not need to be formally registered to be copyrighted and to qualify for the application of the new IP regime.

Notably, the circular also gives helpful guidance on the type of R&D activities that meet the requirements of the new IP regime, and in particular on the enhancement of existing and marketable software.

Key points on determining which R&D expenditures qualify

Important clarifications are given in this area, in particular regarding R&D expenditures incurred by a foreign permanent establishment (PE) within the EEA area of a Luxembourg head office. The circular helps specify one of the conditions, for example, about which expenditures are allocated to the head office of the foreign PE in accordance with the provisions of a double tax treaty. This condition seems to be met in cases where the Luxembourg taxpayer controls...

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