Tax exemptions with regard to industrial and intellectual property rights in Luxembourg


 

Foundation:

Law of 19th December 2007 – Article 50 which introduces a new Article 50-bis to the income tax law.

Principle:

Luxembourg companies enjoy an 80% tax exemption on revenue earned from licensing or assignment of the industrial or intellectual property rights they hold. The rights concerned are all intellectual and industrial property rights, specifically revenue generated by patents, copyrights for computer software, manufacturing trademarks, commercial signs, trademark for example, for ready to wear clothing, designs, basis of production or even a model.

The following are concerned:

Both revenue from licensing these rights (that is their use by third parties) and revenue earned from their assignment, that is their definitive sale. As a consequence of this measure the corporation taxation rate in Luxembourg, approximately 30%, is reduced to an effective rate of 6% on revenue generated by industrial and intellectual property rights.

Qualifying conditions for the tax concession: two in number:

1. Only property rights that were constituted, that is filed in the name of the company requesting the benefit of the exemption, or acquired by the latter after 1 January 2008, are eligible for the exemption.

2. The right for which an 80% exemption is requested shall not have been acquired by the tax-paying company from another company in the same Group, (so for example, a Luxembourg company especially created for this purpose by a French Group which made a contribution in kind at the time of constitution of the Luxembourg company, of a trademark already exploited in the context of the French Group’s franchising network cannot benefit from the 80% exemption).

Accounting:

The Luxembourg company must record on the assets side of its Financial Statement, all expenditure, amortisation and deductions for services related to the acquisition or creation costs of the property right for which the exemption is requested.

Practical cases of application:

Example 1:

Let A be the holding company of a French or Belgian hotel group, known as company A.
Assume that company A acquires a new hotel in the south of France in the form of a new company, B.

In parallel with the acquisition of the capital of B, A constitutes a third company incorporated under Luxembourg law, C. C files a trademark with INPI or the European trademark register depending on the extent of protection desired.

C then grants the right to operate the hotel to B, under the sign of a trademark it has filed (and can prove receipt of the royalties from B).

The royalties will not subject to any deduction at source in France and for B, constitute charges fully deductible in France.

For C, a Luxembourg taxpayer, the revenue benefits from an 80% tax exemption.

So the sums paid as fees can be localised in Luxembourg with C and then be reinvested by the hotel holding A.

Example 2:

Let there be a French holding of an optics group.

The optics group, A, has as its business the sale of spectacles to private clients through shops; it operates itself and the production of frames which are sold in its shops and also by third party retailers.

A establishes a subsidiary in Luxembourg, B.

B’s business is the creation of designs and models for lenses and frames as well as an actual design and styling activity. The designs, models and the trademarks under which they are sold are filed in the name of B which then licenses their use:

• for drawings and models for lenses and frames, by the French Group’s production subsidiary.

• for spectacle trademarks and signs, by the Group itself.

The royalties received benefit from the exemption and allow creating in A, charges which constitute non-taxable revenue in Luxembourg.

Hence a true cash flow can be constituted, in B. This cashflow will be used subsequently to finance new commercial developments through the creation of new signs, new shops and innovations in the product range.

“Art. 50-bis.

(1) Revenue received as remuneration for use or granting of use of a copyright for computer software, a patent, a manufacturing or commercial trade mark, a design or a model are 80% exempt with regard to their net positive amount. Net revenue means gross revenue reduced by direct economic expenditure associated with the revenue, including annual amortisation as well as, if applicable, a deduction for depreciation.

(2) When a taxpayer has itself constituted a patent which is used in the context of its activity, it is entitled to a corresponding deduction of 80% of the net revenue it would have realised if it had granted use of the right to a third party. For the purposes of this paragraph, net revenue means the notional remuneration reduced by the direct economic expenses associated with the revenue, including annual amortisation and if applicable, a deduction for depreciation. The deduction is allowed from the date of filing of the patent application. In the event of rejection of the patent application, the previous deduction shall be added to the taxable profits for the financial year during which the rejection was notified to the taxpayer.

(3) The capital gain generated by granting assignment of a copyright for computer software, a patent, manufacturing or commercial trademark, a design or a model is 80% exempt. By derogation from the previous sentence, the capital gain is taxable at the algebraic sum of 80% of the net deficit generated by the said right during the financial year of its assignment, or previous years provided the net revenue deficit was not offset pursuant to the provisions of paragraph 4 (2).

The exemption provided by the first sentence in this paragraph is also refused insofar as the acquisition price of the rights used to calculate the assignment revenue was reduced by transfer of a capital gain pursuant to Articles 53 and 54.

(4) Application of paragraphs 1 to 3 of this Article is subject to the following conditions:

1. The right must have been constituted or acquired after 31st December 2007;
2. The expenses, amortisation and deductions for depreciation regarding the right shall be included in the assets side of the taxpayer’s Financial Statement and incorporated in the results for the first financial year during which application of the provisions of the aforementioned paragraph are taken into account, provided that for a given financial year these costs have exceeded the revenue for the same right.

(5) Application of paragraphs 1 and 3 is subject to the additional condition that the right has not been acquired by a person with the capacity of affiliate company. A company is considered as an affiliate company for the present purposes:

a. if it owns a direct holding of at least 10% in the capital of the company the beneficiary of the revenue, or

b. if its capital is held directly at least 10% by the company the beneficiary of the revenue, or

c. if its capital is held directly at least 10% by a third company and the latter has a direct holding of at least 10% in the capital of the company benefitting from the revenue.

(6) The taxpayer may have recourse to any generally used evaluation method for the appraisal of intellectual property. For the purposes of application of paragraph 3, the estimated realisation value of the assigned right shall be established pursuant to Article 27, paragraph 2.

Companies constituting micro, small or medium size enterprises may, however, establish the estimated realisation value of a right described in paragraphs 3 as 110% of the algebraic sum of expenditure reducing the basis for taxation of the assignor in the financial year of the assignment and for previous financial years.

For the present purposes, micro, small or medium sized enterprises are those companies which satisfy the criteria established by the regulations of the Grand Duchy.”