The Luxembourg minister of finance has announced that the country's IP income tax regime will be amended to align with the 'nexus' approach agreed on within the Organisation for Economic Cooperation and Development (OECD) as of July 1 2016. Undertakings that benefit from the existing tax regime before this date will continue to do so until June 30 2021.
Under the framework of the Lisbon Strategy for Growth and Employment in the European Union, in 2007 Luxembourg introduced a beneficial tax regime applicable to income from qualifying IP rights. On the basis of this regime, which is enshrined in Article 50bis of the Income Tax Act 1967, Luxembourg undertakings and Luxembourg branches of foreign companies can benefit from an exemption of 80% on revenues derived from and capital gains realised on patent, trademark, design and domain name rights, as well as from software copyrights, to the extent that such rights were established or acquired after December 31 2007. The exemption brings the effective tax rate for such revenues to approximately 5.85%.
IP box regimes in several EU member states – including Belgium, Hungary, France, Luxembourg, the Netherlands, Spain and the United Kingdom – have been criticised for not requiring sufficiently substantial activities or presence for the tax benefits to apply. These regimes ultimately fell under the scrutiny of both the EU Code of Conduct Group on Business Taxation and the European Commission under EU state aid rules. In addition, a common set of rules were being devised at OECD level in the context of the base erosion and profit shifting initiative. These developments generated significant uncertainty around the future of the IP tax regimes concerned.
The European Commission has now dropped its state aid investigation. This change in approach was prompted by a November 2014 joint proposal by Germany and the United Kingdom for rules on preferential IP tax regimes. The proposal is based on the so-called 'nexus' approach, which makes the benefits under the IP tax regime conditional on the extent of the research and development activities pursued by the beneficiaries of this regime. The compromise has been accepted by the OECD and has laid out in the document "OECD/G20 BEPS Project - Action 5: Agreement on Modified Nexus Approach for IP Regimes". The agreement envisages that the existing regimes be closed to new participants as of July 1 2016, and that taxpayers benefiting from the existing regimes before this date be able to continue to do so until June 30 2021.
On February 26 2015 the Luxembourg minister of finance declared in his reply to several questions raised by a member of Parliament that the Article 50bis regime will be amended to align it with the internationally agreed nexus approach. He further confirmed that Luxembourg will close the regime to new entrants by June 30 2016 and that a transitional grandfathering period will be in effect until June 30 2021.
Pending introduction of the new regime, it will be important for companies that are considering rolling out a new IP strategy under the existing Luxembourg tax rules do so by June 30 2016 (the date on which the Article 50bis regime is likely to be closed to new entrants), while being mindful of the fact that the structure will possibly have to be revisited in five years.
Christophe Joosen
Vincent Wellens
Jean-Marc Groelly
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