Luxembourg reviews its tax system on intellectual property (“IP Box”)

The Luxembourg tax regime applicable to earnings deriving from intellectual property rights is evolving to combat “tax dumping”. It will be adjusted to comply with the new standards of the OECD and the European Union Code of Conduct.

In 2007, the new Article 50a of the Income Tax Act of December 4, 1967 exempted up to 80% of all income generated from the licencing of Intellectual Property. This tax relief system, known as “IP Box”, was introduced by a dozen of EU Member States.

However, the States competing to attract businesses in their territories have been under the scrutiny of the OECD and the G20 for several years. To prevent these jurisdictions from using the IP box for tax dumping, the Member States have approved a Code of Conduct listing six criteria to identify tax dumping situations, including the absence of “real economic activity” of companies benefitting from an IP box on the  affected State’s soil.

According to the OECD and the EU, there are two main approaches to explain the criteria of “real economic activity”:

  • The approach of the “nexus of evidence”, founded on the existence of a link between research and development expenditures (R&D) and the income generating from the patents developed (as supported inter alia by Germany);
  • And the approach in terms of assignment pricing, based on the prices charged by the company benefitting from the IP box when it commercializes its intellectual propriety rights in the country (supported inter alia by Luxembourg and the United Kingdom).

Following a publication of an OECD report in September 2014 that recommended the “nexus” approach to assess the criteria of the real economic activity, a consensus emerged around a proposal made by Germany and the United Kingdom and it was decided that the Code of Conduct would be amended to include this “nexus” approach by the end of 2015.

Luxembourg, together with the other affected Member States will therefore have to modify their “IP box” regime accordingly. A progressive application of the new regulations, with a transitional implementation period, is expected. All taxpayers covered under the current regime will be able to retain their prerogatives until June 30, 2021 at the latest. After this date, taxpayers will no longer enjoy the benefits of the former regime. Furthermore, no new taxpayer will be sign up for the existing regime after June 30, 2016.