Until recently Luxembourg maintained a specific exemption for companies owning intellectual property rights. With this so-called IP regime, the actual tax rate could be decreased to 5.84%. Furthermore, this system had a broad application scope with respect to the nature of intellectual property rights, and no conditions were imposed with respect to the development or improvement of the rights in research centres.
At the end of last year, in implementation of an agreement with the OECD as well as the EU, a bill was enacted in Luxembourg, abolishing the IP regime as from 1 July 2016. However, a transitional period was negotiated from 1 July 2016 until 30 June 2021 for intellectual property rights built up or acquired before 1 July 2016.
It remains to be seen what the future will bring. It is expected that a new IP regime will be introduced in conformity with the nexus approach of the OECD report regarding BEPS (Base erosion and profit shifting) Action Plan 5. For this regime, the existence of a substantial economic activity would be key, and the income from intellectual property rights would only be able to benefit from the favourable regime if the cost of research and development is borne by the Luxembourg company.
We base our advice on current legislation, interpretations and legal doctrine. This does not prevent the administration from being able to challenge it or to change existing interpretations.