Intellectual property rights in Luxembourg (IPR): tax exemption

Transcription

1 Intellectual property rights in Luxembourg (IPR): tax exemption Miami, November 3, 2011 Me Beatriz Garcia

2 The tax attractiveness of Luxembourg regarding the intellectual property has increased by the introduction of a tax optimisation regime for the use of intellectual property. Since 1 st January 2008, the Luxembourg Government introduced an attractive measure for companies granting or using copyrights linked to software, licences, patents, designs or models. Therefore the Government confirms its intention to make the country attractive for companies wishing to invest in copyrights and development in Research & Innovation. It's important to note that this measure is available for all the companies, without differentiation based on their origin, nationality, type, shareholding, holding, structure, size... Article 50bis L.I.R. (law on income tax) has provided for an 80% tax exemption of positive net income derived from the use or the right of using of certain intellectual property rights (copyright on software, patent, trademark, design or model and domain names) received by a Luxembourg tax payer, as well as capital gains realized on the transfer of such IP rights. Article 50bis, 2 states that a Luxembourg tax payer using a self-developed patent in its business is also entitled to a deduction of 80% of the net consideration which a third party would have paid for licensing the patent based on market conditions.

3 CUMULATIVE CONDITIONS The IP rights must have been created or acquired after 31 December Obligation to activate any costs, amortizations or depreciations in connection with the IP rights during the first book year for which the application of this regime is demanded. The IP rights may not have been acquired from a legal person who is qualified as an "affiliated person", but may be acquired by a contribution in kind.

4 KEY ADVANTAGES OF THIS REGIME Broad scope of the IP rights. Flexibility The IP can be developed by either the company itself or acquired from a third party The R&D Center may be situated outside Luxembourg. Simplicity The application of this regime is clear end provides with few conditions. Tax perspective 80% of the income out of the IP rights will be exempted, which provides an effective tax burden of 5.7%. The losses are fully be deducted. The capital gains realized are also be exempted at 80%. Exemption of the wealth tax on the qualifying IP rights.

5 This exemption regime may be cumulated with: The SOPARFI regime (providing an exemption on participations); The extensive network of double tax treaties concluded by Luxembourg; The European "Mother-Subsidiary" Directive (no withholding tax in case of dividends distributed) and "Interest-Royalties" Directive (no withholding tax due on any interest or royalties paid between affiliated companies). The exemption is applicable as from the date of registration demands deposit of the IP rights. Special Valuation method for PME companies. The qualifying IP rights are 99% exempt from Net Wealth Tax.

6 The Luxembourg Tax office (Administration des Contributions) published a Circular on 5 March, 2009 setting out the terms and conditions of application of the regime for partial (80%) exemption of income derived from the holding and management of certain intellectual property rights.

7 1. THE SCOPE OF THE IP TAX REGIME The intangible assets that qualify for the partial exemption are: copyright on computer software patent brand name or trademark design a model

8 The circular has brought the following precisions: Utility models (protection certificate for an invention), supplementary protection certificates (in connection with medicine products), the brands of products as well as the brands of services. Regarding professional sportsmen and artists, the following distinction is to be made: If they have first registered their name and/or image as a trademark and then grant a license to a third party for exploitation purposes, then the related royalties may benefit from the tax exemption regime; If they have only put their name and/or image at the disposal of an advertising activity, the related royalties are not connected with a trademark. Therefore, these do not benefit from the tax exemption regime;

9 Domain names are expressly included in the scope of the IP tax regime. A domain name is defined as an electronic personal address which helps locate a website on the internet and therefore enables its owner to advertise the products and services that he offers.

10 Copyright exclusions The commentary on the article of the law states that the definition of rights is guided by the model tax agreement drawn up by the OECD. The tax office indicates that the scope of application of article 50a of the L.I.R does not extend to copyright on secret plans, formulae or procedures and other equivalent rights, or to income derived from the leasing of industrial, commercial or scientific equipment.

11 Protection of rights The Circular states that the protection of a right is usually, but not always, obtained by registering said right in a register held for this purpose. While the procedures for registering patents, brand names, trademarks, designs or models are generally well understood by investors, there are uncertainties as to the procedure for protecting computer software, which is more akin to a literary or artistic work and is protected by copyright. It must be an original work, i.e. an intellectual creation unique to its author. The Tax office will therefore be required to assess the originality of a software application, mainly by analysing its source code, i.e. all the instructions written in a computer programming language that can be understood by humans and enabling a programme to run on a computer.

12 Proof of the date of software creation The Circular suggests a pragmatic approach to proving the date on which a computer programme was created, which can be submitted by any means, and in particular by submitting an 'i- DEPOT" with the Benelux Office for Intellectual Property (Office Benelux de la Propriété Intellectuelle - OBPI) confirming the date on which physical or computerised documents were submitted. A certificate confirming the filing of an i-depot makes no mention of its content nor does it prove that the person who submitted it is the creator or that the content is protected by copyright. Simply producing a copy of the i-depot will prove that the content existed on the date it was submitted. This method of proof remains optional.

13 2. THE SCOPE OF QUALIFYING INCOME According to the circular, in case the legal ownership and the economic ownership do not match with each other, the economic ownership will prevail. Therefore, a licensee company that confines itself to grant sub-licenses is not entitled to benefit from the IP tax regime. The owner of a right may decide to exploit the right itself (exclusively or otherwise), or to exploit it commercially by selling it to a third party or by granting operating licences (exclusive or otherwise) to one or more other persons. If the economic ownership and the legal ownership of an intangible asset are separate, it is the economic owner that is considered to be the owner of said asset for application of article 50a of the L.I.R. The Circular does not appear to require the owner of the asset to also be the creator, inventor or the party that originally registered the right. Only income defined as royalties by the OECD tax treaty model may qualify for the IP tax regime.

14 3. CONDITIONS TO BE COMPLIED WITH The main additional information is: Acquisition after 31 December 2007 The right must have been established or acquired after 31 December In the case of acquisitions, the transfer date is determined by the date of the change of ownership or of one of the transactions that qualify as an acquisition within the meaning of tax law (exchange, contribution, sale, etc.). Development Filing Dates

15 3.2.- Determination of expenses to be recorded the purchase price or the cost price of the material or supplies used in establishing the right; the salaries of the staff; the relevant share of the general costs that relate to establishing the right; amortisation of assets used during the development process, and interest on loans taken out to finance the establishment of the right. However, expenses incurred as per of the general R & D process of the company are not taken into account.

16 3.3.- The precisions on the associated company. Acquisition from a company A company that receives royalties from an operating licence or sells one of the rights does not qualify for exemption if: it acquired the right from a company that directly holds at least 10% of its own capital, or it acquired the right from a company in which it directly holds at least 10% of the capital, or it acquired the right from a company of which at least 10% is held by a third company that directly holds at least 10% of its own capital.

17 Acquisition from an individual Shareholder The IP acquired from an individual may qualify for the benefit of the IP tax regime disregarding the holding percentage. Contribution by a company shareholder The Circular points out that in any dealings between companies and shareholders or partners, the agreed remuneration must comply with the arm s length principle.

18 4. FOREIGN WITHHOLDING TAXES Given the exemption of 80% of the income in Luxembourg, the foreign withholding tax will not be fully creditable against the Luxembourg tax amount. With this respect, the computation rules have been detailed by the circular as regards to the determination of the tax credit amount.

19 MANY THANKS! Me Beatriz GARCIA 5, Boulevard Royal L-2449 Luxembourg