09-04-09
Tax authorities issue a circular on the IP exemption regime
A circular has recently been issued by the Luxembourg tax authorities in order to clarify the conditions necessary for applying the 80% corporate income tax exemption on revenue from Intellectual Property.
This regime has been in place since 2008 and applies not only to current income derived from certain Intellectual Property rights (“IP”) but also to capital gains realised on the disposal of such IP rights.
Nearly 1,5 years after the law was voted, the Luxembourg tax authorities have finally got around to issuing a circular that purports to clarify the treatment of revenue from intellectual property. This delay is in the main due to the tax authorities’ reluctance to endorse the new exemption regime before the green light had been given by the EU. The Circular aims in particular to clarify the conditions that need to be fulfilled in order to qualify for the 80% exemption regime.
IP rights covered
The 80% exemption applies to the net income and capital gains that derive from software copyrights, patents, trademarks, domain names, designs and models. The Circular provides the following additional information on the IP rights, which is mainly based on the IP legislation currently in place in Luxembourg:
- Copyrights on software are only granted to original works (i.e. to an intellectual invention of its author) that have been expressed. Adaptations and corrections do not give rise to a new copyright. The simple existence of a computer programme is enough to give rise to a copyright. The proof regarding the existence of the software and the date of its creation can in principle be established by any means, including the so-called “i-Dépot” at the BOIP (BeNeLux Office for Intellectual Property).
- Patents are industrial property rights that protect inventions that are new, inventive and industrially applicable. Patents grant an exclusive right to an investor for a limited period of time, in exchange for the disclosure of an invention. They are either granted by a State or by supranational bodies like the European patent Organisation or the World Intellectual Property Organisation, that were installed through international treaties.
- Trademarks, designs and models: a trademark is a sign that distinguishes certain goods (products) or services from those of the competitors. Registering a trademark gives the exclusive right to use the trademark for certain goods (products) and services within the territory in which the trademark is registered for a(n) (extendable) period of 10 years. Any individual can register a trademark in his name. A distinction is however made between a trademark and an individual’s rights of publicity. Royalties from trademarks may take advantage of the present regime while revenues from publicity rights may not. The right to publicity is the right of each individual to control the commercial use of his or her name, image or likeness. Revenues from publicity rights would for instance include payments made to a famous person for allowing his name or image to be associated with a particular product. Such revenue would not constitute revenue subject to the present exemption regime.
- Domain names are defined in the circular as an electronic address that enables to locate a website online and allows the operator of the domain name to present and sell his products and services. Registration of a domain name is based on the principle “first come, first served”. The request can be made either by an individual or by a collective entity.
Owner of the IP rights
The Circular specifies that in cases where economic and legal ownership of the IP right is not identical, the economic ownership shall prevail (application of §11 n°4 SteuerAnpassungsgesetz). The economic owner of the IP right is the one who can freely dispose of the IP right. This does not necessarily mean that the one in the name of whom the IP right is recognised/registered.
Exempt income under § 50bis LIR
The Circular indicates that only royalty income within the meaning of article 12 § 2 of the OECD Model Tax Convention is covered. Nevertheless, the scope of article 50bis LIR is however tighter than the one of article 12 § 2 of the OECD Model Tax Convention. If a licence agreement covers additional services than simply IP or the use of IP, then the income must be split in order to determine the part that benefits from the exemption and the part that does not. The same applies if the royalty income relates both to qualifying and non-qualifying IP rights.
Acquisition date of the IP
In order to take advantage of the exemption regime, the IP needs to have been acquired or created after December 31, 2007. The Circular provides guidance as to when IP was created for the purpose of the present regime.
- Copyrights on software: date of creation of the program, i.e. when the work in relation with the creation of the program has been finalized, so that the program is ready for sale;
- Patents: acquisition date is when the patent is requested;
- Trademarks, designs and models: date of registration;
- Domain names: date of the request for registration;
Another issue is whether companies that have held IP before 1st January 2008 but which did not fall under Luxembourg income tax law (i.e. non-residents or Holdings 1929) would be able to make use of the regime, once they come under the authority of the Luxembourg income tax law. This could for instance be the case if a holding 1929 or SPF were to opt out of its tax exempt regime or if a foreign company were to migrate to Luxembourg. The answer to this question boils down to whether the tax authorities would consider the legal acquisition date or the date at which the company became a Luxembourg tax payer. In the present case, the tax authorities indicated they would consider the legal acquisition date. Thus, migrating a foreign company with IP acquired before 1st January 2008 would not give right to the application of the exemption regime.
Affiliated Company requirement
Based on Article 50bis LIR, the IP may not have been acquired from a person that is assimilated to an “affiliated company”. A company A is considered as affiliated to company B in the meaning of the draft law if:
- A directly holds at least 10% of the share capital of B;
- B holds at least 10% of the share capital of A;
- At least 10% of the share capital of A and of B is directly held by a third company.
The Circular indicates that this requirement only applies to collective entities that are legal persons within the meaning of the Luxembourg tax law. The holding via a tax transparent entity within the meaning of article 175 al. 1 LIR is seen as a direct shareholding, proportional to the interest in the net equity of the tax transparent entity. The acquisition of an IP right from an individual shareholder is not subject to this limitation. The affiliated Company requirement has to be analysed at the time the IP right is acquired.
Valuation of the IP
The Circular says that the tax payer can use any valuation method that is recognized internationally in order to determine its market value. The tax payer will have to demonstrate that the method used is appropriate. Based on article 27 al. 2 LIR, the acquisition/selling price of the IP is the market value (“valeur estimée de realisation”) of such IP.
Conclusion
The Circular provides some useful guidance and clarifies some open issues, including the question of whether the partial exemption regime can apply when a Company held a qualifying IP before 2008 but became a Luxembourg taxpayer after December 31st, 2007. While useful, nothing terribly surprising came out of this circular.
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