New IP Regime Passed By The Parliament

Today, the draft law introducing the new Luxembourg BEPS-compliant Intellectual Property (IP) regime was passed by the Parliament. With retroactive effect as from tax year 2018, Luxembourg taxpayers will be able to benefit from an 80% exemption regime applicable to income related to patents and copyrighted software. In addition, IP assets which qualify for the 80% (corporate) income tax exemption will be 100% exempt from net wealth tax.

Which taxpayers can benefit from the new regime?

As the former IP regime, the new regime applies to all Luxembourg taxpayers. This means that the regime is available to both individuals and corporate taxpayers.

Which IP assets are covered by the new regime?

Luxembourg has defined the scope of the new IP regime in accordance with the conclusions reached in the OECD BEPS Action 5 report. Accordingly, the only IP assets that can qualify for tax benefits under an IP regime are patents and other IP assets that are considered as functionally equivalent to patents if those IP assets are both legally protected and subject to similar approval and registration processes, where such processes are relevant.

Therefore, IP rights covered by the new Luxembourg regime are patents defined broadly and copyrighted software. These IP rights fall within the scope of the new regime to the extent that they are not marketing-related IP assets and were created, developed or enhanced after 31 December 2007 (the former IP regime provided the same limitation in time) as a result of research and development (R&D) activities:

(i) Patents defined broadly: inventions protected pursuant to domestic and international provisions in force, by a patent, a utility model, a supplementary protection certificate, a patent extension for paediatric medicines, a plant variety protection title, orphan drug designations; and

(ii) Copyrighted software: software protected by copyright according to the national and international provisions in force.

Marketing assets such as trademarks and domain names are expressly excluded from the scope of qualifying assets.

How is the income receiving tax benefits determined?

The modified nexus approach defined in the BEPS Action 5 report aims to ensure that IP regimes only provide benefits to taxpayers that engage in R&D. The reason is that IP tax regimes aim at encouraging R&D activities. As a consequence, according to the nexus approach, a taxpayer is able to benefit from the IP regime to the extent that it can be...

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