IP Box in Luxembourg enjoyed preferential tax treatment for a long time. Luxembourg-based companies were able to tax 80 % of their income on licenses to foreign companies free of tax. Thus, only 6% of taxes were incurred. This involved licensing revenue on copyrights, such as patents, but also on trademark rights and Internet domains.

In the meantime, the observance of the measures initiated by the OECD to combat tax shifts has led to a new legal situation regarding the taxation of IP Box in Luxembourg. The rules were significantly tightened as of January 1, 2018. It is true that there are still ways in which 80% of the licence income remains tax-free. However, this is only the case with copyright. Tax exemptions for trademark rights and Internet domains are excluded. Furthermore, there are now restrictions on the application of favourable treatment to copyright. Such taxation can only take place if the copyright was created by a company based in Luxembourg. The term nexus approach is also common. In addition, the amount of the tax-free amount is linked to the amount of the investment which financed the creation of the intangible asset.

IP Box in Luxembourg – new taxation law

1. A brief introduction to IP Box in Luxembourg and elsewhere

A few years ago, companies around the world took advantage of the opportunity offered by some countries to save taxes in two ways by moving intangible assets there. In doing so, they founded companies in these countries by equipping them with their own trademark rights, Internet domains and, above all, copyrights, such as patents. Thus, these newly created companies had only one objective, namely the transfer of the rights in these intangible assets to the original owners. Therefore, the technical term IP Box has established itself for these license companies in English jargon, because IP is the abbreviation for “intellectual property”. Although there is now a separate expression with License Box in German, the IP Box is still the usual name. That is why we continue to use them in this article.

So let’s see how this IP Box saved taxes in Luxembourg and elsewhere.

Saving Taxes with IP Box in Luxembourg So Far

On the one hand, a company that acquired rights to intangible assets for its own use from its foreign IP Box could deduct the royalties for this from its profit as an expense. This involved considerable amounts, with which the domestic profit was then indirectly extracted from the IP Box abroad. On the other hand, the IP Box had to pay only a very low tax on the spot, thanks to the favourable legislation on the taxation of licence revenues. IP Box in Luxembourg has been a classic example of this.

In 2007, Luxembourg introduced the preferential taxation of IP Box. At that time, only 20% of the taxation of IP Box took place in Luxembourg, because the Principality had previously provided for the tax exemption of 80% of the licence revenue in its legislation. Thus, the taxable 20 % of the profits of the IP Box in Luxembourg were taxed at the regular rate of 28,8 %, so that in effect only just under 6 % of the licence revenues were taxed.

4th IP Box in the eye of the OECD

For many years, this model was very successful for numerous international corporations but also very ordinary companies, because it was completely legal and profitable after all. But at the latest with the publication of the Panama Papers and Paradise Papers, the tax practices by tax-privileged companies and individuals, which seem reprehensible to many ordinary taxpayers, came into the public eye. Even the leading industrial states, which had to record a decline in tax revenue under this modern form of tax evasion, now made international pressure on such tax havens. This is why countermeasures have been adopted within the framework of the OECD, which should be implemented by its member states at national level. In this way, the aim was to make competition between the states, in terms of business location, and thus indirectly for tax revenue, fairer, because more balanced. Luxembourg also endorsed these measures.

5. The new rules since 2018

So Luxembourg introduced new rules for the taxation of IP Box on 01.01.2018. On the one hand, the tax exemptions on licence fees obtained by IP Box in Luxembourg through the granting of trademark rights and Internet domains are now excluded from the favoured taxation. Thus, only license income from IP Box in Luxembourg is tax-privileged, which comes from the provision of copyright. On the other hand, IP Box in Luxembourg, which generates licensing revenue from the granting of copyrights, can only record them as tax-deferred as before if they can prove that these intangible assets were created by a company in Luxembourg. For this purpose, the term nexus approach has been introduced. In addition, IP Box in Luxembourg can only take into account a tax exemption up to a certain level. The maximum tax-free amount depends on the amount of the investment used to create the intangible asset.