Significant Tax Incentives For IP-Derived Income, IT-Related And Telecommunication Services

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...