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1 Legal Framework

The Luxembourg legislator has introduced, with the law dated 21 December 2007, a new article 50bis in the income law (the « LIR »). This new disposition estbalishes a partial tax exemption amounting 80% over the net income generated by certain rights of intelectual property.

Such dispositions are applicable to incomes received as remuneration for the use or the concession of the use of a right of intellectual property as well as on the capital gain received on the transfer of such right.

On the 05 March 2009, the circular LIR n°50bis/1 from the Luxembourg Tax Administration (the « Circular ») has specified the terms of applicability of this tax regime.

2 Scope

Thanks to this new legislation, the Luxembourg parliament has included as much as intellectual property rights as possible amongst which domain names, patents, brands, copyrights on softwares, patterns or models.

In addition to the rights enumerated by article 50bis of the LIR, the Circular includes in the scope of this article the « modèle d’utilité »,the « certificat complémentaire de protection » as well as the product brands and the services brand.

The Circular recalls that in order to be protected by the copy right, any work should be an original one, that is, an intelectual creation from a creator and should have taken shape.

The legal dispositions remind that the owner of such rights can choose to exploit itself such right or commercialize it by transfering it to a third party or by conceding exclusive or non exclusive utilizing licence to one or several persons.

The Circular however does not admit as a condition that the owner of the good also be the creator, the inventor or the initial depositor in order to benefit form the above dispositions.

3 Conditions of applicability

• Eligible rights have been acquired or constituted after the 31 of december 2007.

The Circular indiquates that the date of constitution of an eligible rights matchs with the date of the depot of the request of record at the register held for this purpose (especially for the patents, brands, « modèle d’utilité », patterns, models and domain names). Concerning copy rights on software, for which there does not exist any register, the date of creation of the program should be retained. The taxpayer should proove by any means such date.

The fact that the taxpayer has already started to develop such right before the 31 of december 2007 does not have any incidence.

• Expenses and amortizations commeceted with IP income should be included into the tax balance sheet on the first fiscal year in order to benefit from such regime.

The Circular states that the expenses include the purchase price or the cost of material or provisions used, the employee’s costs as well as the share in relation to the constitution of the intelectual property right concerned.

• Eligible right have not been acquired from a so-called «affiliated company».

Article 50bis of the LIR states what should be considered as an affiliated company. Any company that receive royalties from an exploitation licence or that transfer one of the rights can not ask to benefit from the tax exemption:

• if it has acquired such right from a company which holds directly or not at least 10% of its own share capital (subsidiary) ; or
• if it has acquired such right from a company in which it holds itself directly at least 10% of the share capital (parent) ; or
• if it has acquired such right from a company that holds directly at least at 10% by a third company and that this third company holds directly at least 10% of its own share capital (sisters companies).

The Circular states that the date on which the relation bewteen the company that has transfered the IP rights and the company that has acquired such IP rights should be analyzed is the date of transfer of the IP rights.

The Circular also states that when a joint stock company has acquired an IP rights from one of its shareholder, being an individual and not a company, the net income generated by such right can benefit from the tax partial exemption without taking into consideration the percentage held by such shareholder.