On August 7, 2017, Luxembourg introduced Bill 7163/00 (the “Bill”), which would insert a new article 50b into the Income Tax Act (ITA), replacing article 50bis. If enacted, the Bill would apply from the 2018 tax year.
On December 18, 2015, Luxembourg enacted Bill No. 6900 (effective July 1, 2016), which abolished the intellectual property (“IP”) regime found in Article 50bis of the ITA, as the existing regime did not follow the “nexus approach” agreed to by the OECD in the BEPS Action 5 Final Report. Article 50bis will continue to apply to income and capital gains during a transitional period beginning on July 1, 2016 and expire on June 30, 2021, with regard to the rights which were created or acquired prior to July 1, 2016, including any related improvements, provided that they have been completed before this date. According to the press release, the new R&D tax incentive should encourage innovation. The Bill also proposes to exempt eligible IP assets from the wealth tax.
The BEPS Action 5 Final Report says that the “substantial activity requirement used to assess preferential regimes should be strengthened in order to realign taxation of profits with the substantial activities that generate them.” The nexus approach was developed for IP regimes, and it allows a taxpayer to benefit from an IP regime only to the extent that the taxpayer itself incurred qualifying R&D expenditures that gave rise to the IP income. The Report recognizes that that IP-intensive industries are a key driver of growth and employment and that countries are allowed to provide tax incentives for R&D activities.
The new article 50b proposed by the Bill defines “eligible expenses” as the sum of expenditures required for R&D that are directly related to the development or improvement of an “eligible asset.” These include expenses incurred by a permanent establishment. Eligible expenses do not include acquisition costs, interest and financing costs, or real estate costs. Eligible assets are defined as IP assets that have been developed or improved after December 31, 2007. These assets include inventions (e.g., patents) and copyright-protected software. “Eligible revenue” is defined as either income derived as remuneration for the use of, or right to use, eligible assets or income directly related to the eligible asset that is included in the sale of a product or service. The proposals provide for an 80% tax exemption of the adjusted eligible net income.