New IP Regime To Be Introduced In 2018 (August 2017)

On 4 August 2017, the text of the draft law introducing the new Luxembourg BEPS-compliant Intellectual Property (IP) regime was released. As from 1 January 2018, Luxembourg taxpayers will be able to benefit, under certain conditions, 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 fully exempt from net wealth tax.

The new regime will replace the former IP regime which had to be repealed as of 30 June 2016 since it was, as many other IP regimes, not in line with the so-called "modified nexus approach" defined in the OECD report on Action 5 of the BEPS Action plan and agreed upon at EU level.

Who will be able to benefit from the new regime? Which income from which IP assets will be covered and which conditions and limitations will apply? We provide answers to these questions based on the recently released draft law which may still evolve and change during the legislative process.

Who can benefit from the new IP regime?

As the former IP regime, the new regime will apply to all Luxembourg taxpayers. This means that the regime will be available to both individuals and companies. In addition, it will apply to Luxembourg permanent establishments of foreign companies located in a European Economic Area country (i.e. European Union, Iceland, Liechtenstein and Norway).

Which IP assets are covered by the new regime?

Luxembourg has defined the scope of the new IP regime in line with the conclusions reached in the BEPS Action 5 report. Accordingly, 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, qualify for tax benefits under an IP regime.

In accordance with the draft law and in line with the conclusion reached in the BEPS Action 5 report, IP rights covered by the new Luxembourg regime are (i) patents defined broadly and (ii) 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 December 31st, 2007 (same limitation in time to the application of the regime as under the former regime) as part of research and development (R&D) activities:

Patents defined broadly: inventions protected pursuant to domestic and...