Intellectual Property Rights And Luxembourg Holding Company – Trademark

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DEFINITION

Luxembourg taxpayers holding Intellectual Property Rights (IPRs) can benefit from a special tax regime introduced in 2008. A company can benefit from an 80% tax exemption on the net income derived from royalties for the use and /or the exploitation of intellectual property rights as well as an 80% tax exemption on income from the sale or alienation of intellectual property rights in Luxembourg.

This regime therefore adequately combines two objectives: it allows full deduction of all R&D expenses for projects that do not generate any commercial result.

However, successful R&D projects are not penalized with excessive taxation once they are applied in real life.

LEGAL BASIS

The tax regime for intellectual property rights was introduced by the law of December 21, 2007, which introduced new provisions of article 50bis §1 and 3 LIR. March 5, 2009

The Luxembourg tax authorities have published a circular on the Luxembourg intellectual property tax regime, which includes guidance on the interpretation of the new provisions.

APPLICABLE INTELLECTUAL PROPERTY RIGHTS

The tax regime applies to the following IP rights acquired by a Luxembourg company after 1 January 2008:

  • Software copyrights;

  • Domain name;

  • Patents;

  • Trademarks;

  • Drawings; and

  • Models.

The following rights do not fall within the scope of the Luxembourg intellectual property tax regime: copyright of literary or artistic works, formulas and/or secret processes.

Expenses with a direct economic link to the IP must be entered as assets in the balance sheet the first year for which the benefit of this tax regime is claimed.

An intellectual property right cannot have been acquired from a person assimilated to an “affiliated company”. A company A is considered affiliated with company B within the meaning of the law if:

  1. it directly holds at least 10% of B’s ​​share capital; or

  2. B holds at least 10% of its share capital; or

  3. at least 10% of the share capital of A and B is held directly by a third party company.

ENTITIES THAT CAN BENEFIT FROM THE IP TAX REGIME

All Luxembourg taxpayers who derive income from declared intellectual property rights are entitled to claim the tax exemption. In addition, taxpayers who develop and use intellectual property (patent) rights themselves are also entitled to claim the exemption.

Unlike other jurisdictions, Luxembourg allows economic ownership of intellectual property rights to be used to claim tax exemption in addition to actual legal ownership.

TAX TREATMENT

An 80% exemption is applied to net income derived from the use, exploitation and sale of eligible intellectual property rights. Net income is defined as gross royalty income less any expenses directly related to income.

Capital gains resulting from the sale of intellectual property rights benefit from the 80% exemption. However, expenses directly related to the intellectual property right, which have reduced the tax base for the tax year concerned or previous years, are recovered up to 80% of the gain. The amount recovered would therefore in practice be offset by the loss carried forward.

If a taxpayer has created his own patent and uses this patent for the benefit of his own business, he is entitled to a deduction of 80% of the net consideration, which a third party would have paid for a patent license under market conditions.

Positive net income is subject to an 80% exemption, but negative net income remains fully tax deductible.

Due to the exemption, the effective tax rate never exceeds 5.72% and in most cases will be even lower due to expenses and depreciation.

Losses can be carried forward indefinitely and double taxation and withholding taxes can be effectively managed based on national laws and the network of double tax treaties.

In addition to this, in Luxembourg, various incentives are available for investments in intellectual property rights.

ASSESSMENT OF IP RIGHTS

For transactions with related parties, generally accepted methods of valuing intellectual property may be used to ensure compliance with the arm’s length principle. Micro, small and medium-sized enterprises (in accordance with the Luxembourg size criteria) can use a valuation of 110% of the total amount of expenses incurred to develop the intellectual property right, in order to avoid costly assessments. When a taxpayer develops an intellectual property, its value corresponds to the sum of the expenses incurred for its development, which reduced the tax base of the taxation year concerned or any preceding year.

INVESTMENT INCENTIVES FOR INTELLECTUAL PROPERTY RIGHTS IN LUXEMBOURG

Luxembourg offers a full range of tailor-made investment incentives designed to give new businesses a head start and more specifically to foster R&D and innovation. Financial support can be granted for the financing of a specific investment and R&D project in order to supplement equity and bank financing.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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