Following the adoption of the new law on the Intellectual Property Tax Regime (“IP Regime”) on 22 March 2018 (please refer to our newsletter dated March 2018 on that topic), the Luxembourg Tax Administration published on 28 June 2019 Circular L.I.R. n° 50ter/1 clarifying the application of the IP Regime.
Guidance has been provided especially with regard to the application of the nexus ratio, the foreign tax credit, adjustments of the eligible net asset income, the compensation mechanism as well as qualifying costs under the IP Regime. With regard to the compensation mechanism allowing to determine the new eligible adjusted and compensated IP income, the Circular provides guidance on specific cases such as cases where one of the eligible assets realises a negative adjusted net income and at least one other eligible asset generates a positive income.
With respect to the qualifying costs, the Circular provides a list of what could constitute qualifying costs, such as salary costs of researchers and their support staff, acquisition costs of required instruments and equipment or costs related to the building of prototypes.
Finally, the Circular emphasises that taxpayers will need to provide detailed supporting documentation regarding the eligible expenditures, total expenditures, and eligible income in relation to each qualifying IP right (family or products or services in certain specific cases).
Finally, the Circular also provides guidance on the specificities related to the transition from the previous tax regime into the new IP Regime. Taxpayers concerned should carefully consider if and when to transition from one regime to the other, if possible, as such a choice is irrevocable.