Luxembourg Minister of Finance Pierre Gramegna announced on 3 March 2015, in his answer to a parliamentary question on patent box, that the Luxembourg intellectual property (IP) tax regime will soon be amended so that is aligned with the so-called “modified nexus approach”.
In the framework of the base erosion and profit shifting (BEPS) action plan, members of the Organisation for Economic Co-operation and Development (OECD) discussed several approaches to requiring substantial activities and presence for the application of favorable IP tax regimes. In November 2014, a joint proposal for a nexus-based approach was submitted by Germany and the United Kingdom was submitted. This proposal has been accepted by the OECD and has been laid down in the document “OECD/G20 BEPS Project - Action 5: Agreement on Modified Nexus Approach for IP Regimes”, which contains the following provisions:
- Under the so-called “nexus approach”, a particular emphasis is placed on the existence of a substantial economic activity. More precisely, income derived from eligible IP rights may benefit from a favorable tax treatment in proportion of the research and development expenditures incurred by the taxpayer in relation to the said IP rights. Additionally, under certain circumstances, an up-lift of the eligible expenditures might be increased by 30%.
- As soon as the “nexus approach” is introduced in the relevant countries and in any event after 30 June 2016, the existing IP regime should be closed to new entrants. According to Mr. Gramegna, in Luxembourg, a grandfathering clause will allow all taxpayers benefitting from the current IP regime to keep such entitlement until 30 June 2021.
- By June 2015, the OECD should provide further guidelines to apply a practical approach to trace and identify eligible expenditures and closely monitor the transition period to avoid any abuse of the grandfathering provisions by new entrants. Moreover, the definition of qualifying IP rights will need to be amended in order to include patents and equivalent assets, whereas trademarks should be ruled out.
For what concerns Luxembourg, Mr Gramegna informed the Luxembourg parliament that the legislative process will start in 2015, as to adapt the Luxembourg IP regime (embedded in Article 50 bis of the Luxembourg Income Tax Law) to the new, recommended international standard.
What to consider?
- Any eligible IP holders that wish to benefit from the current Luxembourg IP regime may still implement an IP holding structure until 30 June 2016.
- Holders of eligible IP rights that carry out already an activity in Luxembourg may continue relying on the Luxembourg IP tax regime without any changes until 30 June 2021.
- Luxembourg companies and taxpayers should properly assess their status and eventually reorganize their IP rights holding activity in line with the new rules.