On 4 June 2019, the Luxembourg Higher Administrative Court (Cour Administrative) handed down a judgment on the application of the intellectual property partial exemption regime.
In the case at hand, an individual resident taxpayer holds various patents, including the one at issue in the present litigation (the "Patent"). By virtue of a license agreement, the taxpayer made the Patent available to a Belgian company, of which he is also managing director and employee. At the same time, the taxpayer was also an employee and director of a Luxembourg resident company.
The tax issue arose as the taxpayer treated the income from the Patent as income from a self-employed activity benefiting from the 80% exemption, provided for in Article 50bis of the Luxembourg Income Tax Law ("LITL"). The tax administration however disagreed with the above treatment and qualified the income as royalties received for the concession of a patent, as it took the position that the patent formed part of the taxpayer’s private fortune and not his professional assets maintained by virtue of the self-employed activity. Indeed, it held that being employed as a director would prevent the taxpayer from concurrently exercising a self-employed activity. Both the Director of tax authorities and the lower administrative court (Tribunal Administratif) confirmed the tax authorities’ position.
In its judgment, the higher administrative court (Cour Administrative) reversed the lower administrative court's judgment in that it agreed that the taxpayer had validly exercised a self-employed activity as an inventor and the fact of being a director of the company that exploits the patent is not sufficient to affect the taxpayers independence, which constitutes one of the conditions to undertake a self-employed activity. As a result, the activities of inventor and employee/director can be separated and the patent in question was therefore deemed to be part of the inventor's professional assets, allowing the income derived from it to benefit from the 80% exemption provided for in Article 50bis of the LITL.