International tax advice

IP-Copyrights - royalties

The Government introduced an attractive measure for companies granting or using copyrights linked to softwares, licences, patents, designs or models. 80% of the net income of companies will be exempted from tax. This exemption is also given for taxpayers creating or using their own copyrights. This notional tax deduction is calculated in relation to the market value of these rights.

The exemption is also available for the capital gain generated by these rights (a recapture rule will be instituted).

Therefore the Governement 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....

Exemption of income derived from intellectual property

The Luxembourg Tax office (administration des Contributions) recently published a Circular 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.

The first paragraph of article 50a of the L.I.R. (law on income tax) deals with the partial exemption of royalties earned as remuneration for the use or licensing of the use of:

The second paragraph contains a special provision relating to taxpayers that have themselves produced a patentable design which they use in the course of their own business, while paragraph 3 provides for partial exemption of capital gains realised when selling one of these rights.

Domain names

A recent amendment to the law states that website domain names (e.g., www.domainname.com) are also included in the intangible assets that qualify for this exemption.

Rights also exempted from Wealth Tax (Impôt Sur Fortune - ISF)

The Circular confirms that the property rights referred to in article 50a of the L.I.R. are not classified as business wealth (fortune d'exploitation) and as such are exempted from wealth tax for the 2009 tax year, i.e. on the tax bases established on 1 January 2009 et seq.

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.

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.

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.

Domain names

The question of domain names is not regulated by any legal provision. The Circular defines a domain name as a "unique, personal electronic address that locates a particular website in the virtual world, thereby allowing the owner of such a domain name to advertise its presence to other internet users and to display or market the goods and services it offers”.

Owner of an Intellectual Property Right

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.

The StAnpG (Steueranpassungsgesetz) tax adaptation law stipulates that if a person other than the legal owner of an asset (i.e., the owner of the right in whose name the asset is officially registered) behaves in such a manner that they deprive the legal owner of any possibility of making use of said asset, the asset is attributed to them for tax purposes. Consequently, 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 in order to be able to apply the provisions of paragraphs 1 or 3 of article 50a of the L.I.R.

Plurality of services and compensation

Only income that qualifies as a royalty within the meaning of the OECD model agreement is likely to qualify for the exemption. In particular, this includes any compensation received in connection with violations of property rights. If the licence agreement also includes the provision of other services, the licence agreement must be split in order to determine the portion of income likely to fall within the scope of application of article 50a of the L.I.R... The same shall apply if the royalties invoiced relate both to eligible and ineligible intellectual property rights.

Acquisition after 31 December 2007

The right must have been established or acquired after 31 December 2007. 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.).

Transformation of ‘Holding 1929’ Companies

The Circular takes into consideration the elimination of the status of a tax-exempt collective undertaking (such as a Holding 1929); collective undertakings retain their legal personality from both a commercial and tax point of view. This change shall have no impact on the effective acquisition price and date of these assets.

The same principle shall apply in the case where a collective undertaking transfers either an isolated asset or a range of assets to a stable Luxembourg-based institution, regardless of whether this transfer takes place in the course of establishing the stable Luxembourg-based institution or afterwards. The same shall apply if a non-resident collective undertaking becomes tax-resident in Luxembourg.

Development

The fact that the taxpayer had already started to develop said right before 31 December 2007 is of no consequence. With regard to software, the Circular confirms that the date in question is the date on which the computer programme was created, i.e., the date on which all the work required to create the programme was completed and it was ready to be marketed.

Filing dates

For patents, the date the right is established corresponds to the date on which the patent application was filed.

For brand names, trademarks, designs and models, protection is obtained by registering these rights in the appropriate register.

A company that has been using a design or model to brand its products or services without having registered said design or model would subsequently be unable to claim that the dates on which they filed their registration applications correspond to the date on which the right was established.

For domain names, the date of establishment is the date on which the registration application is filed with the register that manages the TLD (top level domain) in question.

Determination of income

Certain charges must be posted to the asset side of the balance sheet for the results of the first financial year in which article 50a of the L.I.R becomes applicable. The charges thus activated are to be amortised over the normal useful life of said right.

The Circular mentions these expenses, and in particular:

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:

The holding of an interest through a transparent entity within the meaning of Luxembourg tax law is treated as a direct holding in proportion to the share held in this entity’s net assets.

Acquisition from an individual Shareholder

The Circular confirms that if a joint-stock company has acquired a right from one of its individual shareholders, the net income arising therefrom may qualify for partial exemption irrespective of the level of the interest held by this shareholder.

Contribution by a company shareholder

To determine whether income earned may qualify for partial exemption, it is necessary to analyse the participating interest at the time of the sale of the intangible right.

The Circular indicates that in the case of a contribution of an intangible asset to a collective undertaking in exchange for shares in the receiving undertaking in favour of the contributor, the relationship between the contributor and the receiving undertaking must be analysed immediately before the contribution is made.

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.

Application of foreign withholding tax and Examples

The Circular gives further details of the methods for applying foreign withholding taxes to the royalties earned as well as several practical examples demonstrating the method for calculating the exemption of the rights.

In Euro  

Commercial income

Royalty income

Total income

Turnover

200 000

400 000

600 000

Costs link to the activity

50 000

50 000

100 000

Financial charges

50 000

50 000

100 000

Gross profit before tax

100 000

300 000

Exemption

-

240 000

Taxable base

100 000

60 000

Taxes (29,63 %)

29 630

17 778

47 408

Net profit

70 370

282 222

352 592

Article 50bis

The article 50bis is introduced in the law framework regarding the income tax is available from 2008:

(1) Incomes received as remuneration for the use or the concession of the use of a copyright on software, on a patent, on a trademark or a brand name, on a pattern or on a model are exempted up to 80 % of their net positive amount. The net income is determined by the gross income reduced by expenses that have direct economic relative to this income, including the yearly amortization, if need be, a carried out deduction for depreciation.

(2) When a taxpayer has himself set up a patent and that this one is used under his activity, he is entitled to a deduction corresponding to 80 % of the net positive income that he would have made whether he had conceded the use of this right to a third company. The net income, in this paragraph sense, means the fictive remuneration reduced by expenses having direct economic dealings with this income, including the yearly amortization as well as, if need be, a carried out deduction for depreciation.

The deduction is granted from the patent’s registration filing date. In case of refusal of the patent’s registration, the previous deduction must always be added to the taxable profit of the running fiscal year during which the refusal has been notified to the taxpayer.

(3) The capital gain realized upon transfer of a copyright on software, on a patent, on a trademark or on a brand name, on a pattern or on a model is exempted up to 80 %. Notwithstanding the previous sentence, the capital gain is taxable at the rate of the algebraic sum of 80 % of the income even so this net negative income has not been compensated pursuant the paragraph 4, number 2.

The exemption expected by the first sentence of this paragraph is also refused insofar as the acquisition price of the rights at stake for the determination of the transfer income has been reduced by the transfer of an capital gain under the articles 53 and 54.

(4) The application of the paragraph 1 to 3 from this article is subject to the following conditions:

1 The right must have been established or acquired after the 31 December 2007.

2. The expenses, amortizations and deductions for depreciation in relation with the right to keep as an asset in the taxpayer’s balance sheet and to integrate in the figures of the first fiscal year for which the application of the above-mentioned paragraphs is taken into account even so, for a given fiscal year, these expenses have exceeded the income in keeping the said right.

(5) The application of the paragraphs 1 and 3 is subject to the additional condition that the right has not been acquired by a person who has the quality of a related company in the sense of this paragraph :

a) If it holds a direct stake of at least 10 % in the capital of the company which benefits of the income, or

b) If its capital is directly held at the rate of at least 10 % by the company which benefits of the income, or

c) If its capital is directly held at the rate of at least 10 % by a third company and that this one holds a direct stake of at least 10 % in the capital of the company which benefits of the income.

(6) The taxpayer can use any valutation method generally used for the valuation of intellectual properties. For the purposes of the application of the paragraph 3, the estimated value of the transferred right’s realisation must be established in accordance with the article 27, paragraph 2.

Companies which meet the characteristics of a micro, small or medium-sized companies can however establish the estimated value of realisation of a right described in the paragraph 3 at 110 % of the algebraic sum of the expenses that have reduced the tax base of the transferor for the transfer fiscal year and for previous fiscal years.

A micro, small or medium-sized company means, in this paragraph sense, companies which meet criterions established by Luxembourg’s rules.

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