1. Tax rate on IP ownership
Royalty income and capital gains are generally subject to corporate income tax at 29.63% (in Luxembourg City). However, a tax deferral can be obtained by rolling over gains into other assets.
From 1 January 2008, companies are entitled to an 80% tax deduction for income from software copyrights, patents, trade marks, designs or models giving rise to a corporate tax rate on such revenue of 5.9% (for Luxembourg City). The deduction is computed on the net income. The net income is determined by reducing the gross income from IP by the expenses directly connected to such IP, inclusive of the annual amortisation and, if any, the deduction for reductions in value.
The deduction is applicable not only to income from licences but also to income from the sale of goods produced or services provided by the Luxembourg company that directly holds the IP in question. In the latter case, the 80% deduction is calculated by reference to a deemed arm’s-length remuneration that the company would have received had the goods or services been produced or provided by an unrelated third party under a licence, after deduction of expenses directly connect to such IP, inclusive of the annual amortisation and, if any, the deduction for reductions in value.
The 80% exemption also applies to capital gains realised on the disposal of IP from software copyrights, patents, trade marks, designs or models – with recapture of losses which have been fully deducted due to related expenses and amortisation of the IP and of capital gains "rolled over" into the relevant IP.
The 80% exemption regime is subject to the following conditions
- the IP must have been created or acquired after 31 December 2007;
- during the first fiscal year in which the IP partial exemption regime is applied, the taxpayer must activate all previously claimed expenses, amortisations and deductions connected with the IP and include these in its taxable basis;
- the IP must not have been acquired from a related company. Related companies are specifically defined as parent companies that directly own at least 10% of the share capital of the taxpayer, subsidiaries in which the taxpayer holds directly at least 10% of the share capital and sister companies as long as at least 10% of their share capital is directly owned by the same parent company.
To the extent insufficient taxable profit is available to use all or part of the royalty deduction, any unused portion may not be carried forward.
2. Withholding taxes
Luxembourg generally does not levy any withholding tax on royalties.
Luxembourg has a wide range of tax treaties providing for a zero rate withholding tax. However, structuring using Luxembourg vehicles requires careful planning as to substance in order to avoid application of the anti-avoidance rules.
3. CFC rules
Luxembourg does not have CFC rules.