VCL Luxembourg Flash Tax News

Topics

  1. New Luxembourg Intellectual Property regime, applicable as from January 1st 2018
  2. Signature of a double tax treaty (“DTT”) between Luxembourg and Cyprus
  3. Signature of a new DTT between Luxembourg and France
  4. Entry into force of the Multilateral Convention to Implement related measures to prevent Base Erosion and Profit Shifting (“MLI”)

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1. New Luxembourg Intellectual Property regime, applicable as from January 1st 2018

On March 22nd 2018 the Luxembourg Parliament has approved a new law (“Law”) regarding the taxation of income realised in connection with qualifying intellectual property assets (“IP assets”).

This new tax regime is in line with the OECD modified nexus approach and generally provides for an 80% tax exemption on the so-called weighted adjusted eligible net income. The new provisions should apply as from January 1st 2018.

Background
The Law has been approved on March 22nd 2018 and provides for a new tax regime for income realised in connection with IP Assets. In particular, the Law is intended to create a favourable tax framework in order to encourage research and development activities (“R&D”) by Luxembourg taxpayers. For this purpose, an 80% tax exemption should be granted on the so-called “weighted adjusted eligible net income”.

The Law is based on the so-called modified nexus approach and is aligned with the latest OECD requirements.

Main features
The Law provides for an 80% tax exemption on the “weighted adjusted eligible net income” realised by Luxembourg taxpayers in connection with “qualifying IP assets”.

Qualifying IP assets
Further to the Law, the term “qualifying IP assets” should comprise the following IP assets:

  • Inventions protected by a patent, utility model or similar right, either under Luxembourg domestic law or under international law.
  • Software protected by copyright, either under Luxembourg domestic law or international law.
  • Commercial IP assets, such as trademarks or domain names are excluded.
  • The IP assets must be constituted, developed or enhanced by the taxpayer in the context of R&D activities performed by the taxpayer after December 31st

Weighted adjusted eligible net income
The Law defines the “weighted adjusted eligible net income” further to the below formula:

  • The term “adjusted eligible net income” refers to the aggregate “net positive income” realised in connection with, among others, the licensing of the qualifying IP assets and their disposal. The term “net positive income” means the difference between the aggregate gross proceeds and the overall expenses incurred in direct or indirect relation to the qualifying IP assets. Where a taxpayer holds more than one qualifying IP asset, the “net positive income” must be assessed on an aggregate basis (i.e. the “net positive income” realised in connection with an IP asset should be used to offset the “net negative income” realised in connection with another IP asset).
  • The term “eligible expenses” refers to the expenses incurred by the taxpayer upon the constitution, development and enhancement of the qualifying IP assets in the context of the R&D activities conducted by the taxpayer. It includes the amounts the following amounts:
    • Amounts borne by an operational permanent establishment of the taxpayer (“PE”), which is located in another European Economic Area member state, in the context of the R&D activities conducted by the PE provided that (i) the expenses connected with the R&D activities of the PE must be allocated to the Luxembourg head office under the applicable tax treaty and (ii) such expenses are not entitled to a comparable IP tax regime in the state where the PE is located.
    • Amounts paid by the taxpayer to unrelated parties for the R&D activities conducted by such unrelated parties in favour of the taxpayer and which are directly linked to the constitution, development or enhancement of the qualifying IP assets. Acquisition costs, real estate costs and interest charges shall be excluded. This applies as well if the unrelated party invoices a related party which, in turn, recharges the expenses to the head office without applying a margin.
  • The term “total expenses” refers to the “eligible expenses” together with the acquisition costs and the R&D costs paid by the taxpayer to related parties.

Other requirements
The taxpayer should make available to the Luxembourg tax authorities the documents supporting the nature and amount of the IP assets, income and expenses incurred.

Transitional period
Taxpayers who continue to benefit from the old IP regime (repealed as of June 30th 2016) during the grand-fathering period ending on June 30th 2021 are entitled to choose between the old IP regime or the one provided in the Law. The choice must apply to all IP assets held by the taxpayer and cannot be modified for subsequent fiscal years.

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2. Signature of a DTT between Luxembourg and Cyprus
On March 22nd 2018, the Luxembourg Parliament has passed bill number 7226 regarding the approval of the DTT signed between Luxembourg and Cyprus. The DTT could be applicable as from 2019 provided that both signatories ratify it in 2018.

The DTT generally follows the 2014 OECD Model Tax Convention although it also includes some items provided in the 2017 OECD Model Tax Convention and the Multi-Lateral Instrument (“MLI”). In this context, it includes a principal purpose test and a real estate rich clause.

The DTT should apply to collective investment vehicles (CIV) which are subject to tax in one of the two contracting states, even if the CIV is exempted  from tax as a result of meeting objective criteria provided in its residence state tax laws. Such CIVs should qualify as the beneficial owners of the income they receive.

The DTT between Luxembourg and Cyprus was ratified by the Luxembourg Parliament on March 22nd 2018 and should enter into force on the date of receipt of the last instrument of ratification. Its provisions should apply as from January 1st of the following calendar year. Therefore the DTT could be applicable, at the earliest, as from 2019.

We would like to draw your attention to the main aspects of the DTT which could impact investment decisions:

  • Residency (article 4 and Protocol to the DTT: a CIV should be considered as tax resident and the beneficial owner of the income it receives provided that it is subject to tax in one of the contracting states but is entitled to a tax exemption as a result of meeting specific objective criteria.
  • Dividends (article 10): the DTT provides a 5% withholding tax (“WHT”) at source on dividends. However no WHT should be due if the beneficial owner of the dividends is a company holding at least 10% of the share capital of the company paying the dividends.
  • Interest (article 11): arm’s length interest payments should not be subject to any WHT at source.
  • Royalties (article 12): arm’s length royalty payments should not be subject to any WHT at source.
  • Capital gains (article 13): capital gains realised on the disposal of shares in a company deriving more than 50% of their value directly from immovable property situated in one of the contracting states may be taxed in that contracting state.
  • Double taxation (article 23): double taxation in Luxembourg is generally avoided via the exemption with progression method, although the credit method should apply to dividends. However, the exemption shall however not apply to income derived or capital owned by a resident of Luxembourg where Cyprus applies the provisions of the DTT to exempt such income or gain from tax.
  • Anti-avoidance provisions (preamble and article 28): the treaty’s explicit purpose is to avoid double taxation and prevent tax evasion and avoidance. Likewise it contains a principal purpose test precluding the application of the treaty to artificial tax-driven arrangements.

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3. Signature of a new DTT between Luxembourg and France
On March 20th 2018 Luxembourg and France have signed a new DTT which will replace the existing one (dating from 1958). The new DTT should enter should be applicable, at the earliest, as from 2019.

The new DTT generally follows the structure and the content of the OECD 2017 Model Tax Convention. In particular, it includes a principal purpose test and a real estate rich clause.

CIVs are granted limited access to the DTT benefits.

The new DTT between Luxembourg and France was signed on March 20th 2018 and should enter into force once Luxembourg and France have exchanged the relevant instruments of ratification. The DTT provisions should be applicable as from January 1st of the calendar year following the entry into force. Therefore the DTT could theoretically be applicable, at the earliest, as from 2019.

We would like to draw your attention to the main aspects of the DTT which could impact investment decisions:

  • Persons covered and tax residence (article 1 and protocol):
    • tax transparent entities should fall out of the scope of persons covered by the DTT. French SCIs and other similar entities (i.e. entities subject to French income tax for which the investors are personally liable to tax) should be covered by the tax treaty.
    • CIVs should be granted limited access to the DTT benefits. Without entering into technical detail, CIVs established in Luxembourg or France and assimilated, according to the laws of the other state, to CIVs situated therein, should be entitled to the DTT provisions on dividend and interest payments. However, this entitlement should be restricted to the share of the dividend/income held by residents of (i) France, (ii) Luxembourg and (iii) a third jurisdiction having signed a convention on mutual administrative assistance against tax evasion with the state where the dividend/interest arises.
    • In case of conflict, a company should be deemed to be resident in the state where its place of effective management is located.
  • Dividends (article 10):
    • Dividends should trigger a 15% WHT. However no WHT should be due if the beneficial owner of the dividends is a company holding a direct participation of, at least, 5% of the share capital of the company paying the dividends during 365 days including the day when the dividends are paid.
  • Dividends paid out of tax exempt income or gains derived from immovable assets held by an investment vehicle established in one of the contracting states, which distributes annually most of its income (“REIT”), should have the following treatment:
    • Domestic WHT rate (currently 15% in Luxembourg) if the beneficial owner of the dividend is resident in the other contracting state and holds, directly or indirectly, a shareholding of 10% or more in the share capital of the investment vehicle.
    • 15% WHT rate in all other cases.
  • Interest (article 11): arm’s length interest payments should not be subject to any WHT at source.
  • Royalties (article 12): arm’s length royalty payments by a French resident company should be subject to maximum 5% WHT in France. Luxembourg does not apply WHT at source on royalty payments..
  • Capital gains (article 13): capital gains realised on the disposal of shares in a company deriving more than 50% of their value directly or indirectly from immovable property situated in one of the contracting state at any time during the 365 days preceding the disposal may be taxed in that contracting state.
  • Double taxation (article 23): double taxation in Luxembourg is generally avoided via the exemption with progression method, although the credit method should apply to dividends and royalties. However, the exemption shall however not apply to income derived or capital owned by a resident of Luxembourg where France applies the provisions of the DTT to exempt such income or gain from tax.
  • Anti-avoidance provisions (preamble and article 28): the treaty’s explicit purpose is to avoid double taxation and prevent tax evasion and avoidance. Likewise it contains a principal purpose test precluding the application of the treaty to artificial tax-driven arrangements.

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4. Entry into force of the MLI
The MLI will enter into force on July 1st 2018, after Slovenia having deposited the fifth instrument of ratification on March 22nd 2018. The other four jurisdictions which have deposited the MLI instrument of ratification with the OECD are as follows:

  • Austria (September 22nd 2017).
  • Isle of Man (October 19th 2017).
  • Jersey (December 15th 2017).
  • Poland (January 23rd 2018).

Its entry into force will bring the MLI into legal existence only in these five jurisdictions and will take effect as from January 1st 2019.

For other jurisdictions, such as Luxembourg, the MLI will enter into force on the first day following a three-month period after the submission of their respective ratification instruments. However, the MLI provisions should be applicable after a specific time period has elapsed (i.e. generally as from January 1st of the calendar year following the year in which MLI enters into force).

Once ratified, the MLI will only affect DTTs concluded with other jurisdictions which have already ratified the MLI and which have included the relevant DTT in their list of covered DTTs.

We trust you find this publication useful and welcome the opportunity to answer any questions or comments you may have with respect to its contents. Kindly note that this publication does not constitute any legal or tax advice.


Raffaele Gargiulo
Partner


Andrew de Vries
Partner


Eduardo Trancho
Senior Associate


Gabriel Amar
Associate


Stéphanie Raffini
Associate