By the Act of 21 December 2007 the legislator in Luxembourg introduced a new Luxembourg IP regime that provides for a 80% tax exemption for income derived from intellectual property, as well as from capital gains realized on the disposal of such intellectual property. The aim of this law is to encourage companies to invest more in research and development and will increase Luxembourg’s appeal for holding of intellectual property. We will also briefly discuss the new changes to the Luxembourg IP Tax Law introduced by the Act of 19 December 2008 below
Intellectual Property (IP) Rights
The Luxembourg IP Company
Main Features Regime Applicable to Royalties Income Derived from Intellectual Property
Luxembourg legal or natural person receiving royalties as a consideration for the use of software licences, software programmes, trademarks, designs or models benefit from a 80% exemption on their net income. Net income is defined as the gross royalty income received by the legal person or individual reduced by the amount of expenses directly related to this income.
Regime Applicable to Capital Gains
Capital gains realized on the disposal of intellectual property (software licences, software programmes, trademarks, designs or models) will in principle benefit from an 80% exemption, subject to certain rules as set out in the Luxembourg IP Tax Law.
Conditions to be Met
The IP must have been created or acquired after 31 December 2007;The expenses related to the IP must be recorded as an asset in the balance sheet for the first financial year for which the application of the regime is requested;The IP may not have been acquired from a person qualified as an “affiliated company”.
The concept of affiliated company has been clarified by the draft law. Company X is considered to be an affiliated company of company Y if:
- Company X directly holds a participating interest of 10% in the share capital of Y
- Company Y directly holds a participating interest of 10% in the capital of X;
- 10% or more of the share capital of X and Y are directly held by the same company.
Advantages
- The scope of IP acquired from third parties is broad; it may include any patents, any software licences, trademarks, designs, models or domain names. Only 20% of the net income derived from IP will be taxed at 28.59% which provides an effective tax burden of roughly 5.7%.
- The IP can either be developed by the company itself or can be acquired from a third party. Income derived from IP developed by the company itself can also be deducted (80% of the net income it would have received from a third party for the use of the patent).
- The IP-right can be depreciated at a rate of 10% / year (for tax and accounting purposes). Luxembourg companies (SOPARFI, etc.) can in general benefit from the extensive network of Luxembourg double tax treaties as well as from the EU directive on royalty payments (as opposed to offshore jurisdictions).
No Withholding Tax
On 1 October 2008 the Luxembourg government presented certain bills to the Luxembourg parliament. These bills introduced:
The reduction of Luxembourg withholding tax to 0% for dividends paid to a parent company, which is;
a) considered a tax resident in a country with which Luxembourg has concluded a tax treaty for the avoidance of double taxation, and
b) subject to a tax comparable to the Luxembourg corporate income tax regime, and
c) owns (or commits itself to own) a stake of at least 10%, or with an acquisition cost of €1.2M, for at least 12 months.
The Luxembourg SPF As Alternative to the Trust
Societe de Gestion de Patrimoine Familial
Introduced by the Law of 11 May 2007, the Family Wealth Management Company, commonly known as the “SPF” (“Société de gestion de Patrimoine Familial”), is the response of the Luxembourg financial sector to the abolition of the Holding 29 company regime.
The SPF is a wealth management company vehicle exclusively aimed at private individuals. It is important to know that the goal of this company is limited to the acquisition, holding and management of financial assets. The SPF is exonerated from any direct income tax. Only an annual subscription tax of 0.25% applies to the paid-up capital.
The tax authority in charge of auditing the SPF is the “Administration de l’Enregistrement et des Domaines”, not the normal tax authorities… Could have some advantages…..
There are no legal restrictions to the form of an SPF. It may have the form of:
– a public limited liability company (société anonyme – “SA”);
– a private limited-liability company (société à responsabilité limitée – “SARL”);
– a partnership limited by shares (société en commandite par actions – “SCA”); and
– a cooperative company organized under the form of an SA (société cooperative organisée sous la forme d’une SA).
The SPF is perfect for private individuals acting within the framework of managing their private wealth. It is a wealth management entity acting exclusively in the interest of the private assets of individuals (e.g. trusts, private foundations, pure holding companies, stichting administratiekantoor and similar entities);
Allowed Activities
The exclusive purpose of the SPF is the acquisition, holding, management and sale of financial assets (shares, bonds, bank assets, SICAVs, collective investment funds, etc.).
Furthermore, the SPF may hold any participating interests in other companies provided it does not intervene in their management.
The SPF is not allowed to exercise any kind of commercial activity. Therefore, it may not carry the following activities:
– Trading in financial assets and financial services;
– Granting of remunerated loans;
– Holding of patents; and
– Acquisition and direct holding of real estate properties.
Tax Aspects
The SPF is exempt from corporate income tax, municipal business tax and net wealth tax. However, the SPF may lose the benefit of this tax exemption if over 5% of the dividends received originate from shares held in non-resident and unlisted companies, which are not subject to tax at a rate of at least 11% .This penalty applies only to the current financial year and does not lead to the status of SPF being lost.
The only taxes to which the SPF is subject is a 0.25% subscription tax on the paid capital plus, where applicable, share premium and any debts exceeding eight times the paid-up capital and the share premium. A minimum amount of EUR 100 per year is due with a maximum taxation of EUR 125,000. That’s right, only 0.25% on the paid up capital … If the SPF takes out some loans at a later stage for investments… it will not be governed by the 0.25% tax….
In terms of income distributed by the SPF no withholding tax will usually apply to dividends and liquidation proceeds. However, mind that this special tax status excludes the SPF from the benefits granted by the double tax treaties and the European Directives.
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