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With several measures recently introduced to improve Luxembourg’s competitiveness as a financial centre, are corporate taxpayers benefiting? Thierry Lesage reports

Luxembourg’s tax system is constantly evolving, with the aim of improving the country’s competitiveness in general and its financial centre in particular.

In May 2008, Luxembourg’s Prime Minister, Jean-Claude Juncker, announced several measures, the major change being the abolition of capital duty as of 1 January, 2009. While capital duty had already been reduced from 1% to 0.5% from the beginning of this year and was due to be abolished as from 2010, the Government decided to speed up the abolition in order to make Luxembourg still more attractive for foreign investments.

Besides, the aggregate rate of corporate income tax and municipal business tax should progressively be reduced from a maximum of 29.63% (Luxembourg City rate) to 25.5%. No details have yet been announced on the proposed timing but this decrease is likely to spread over at least two years. The tax base is also likely to be widened slightly in order to limit the impact for the budget.

A law of 21 December, 2007 has introduced a new tax regime (effective since 1 January, 2008) in the field of intellectual property (IP) with the intention of attracting the management of IP rights and to encourage the development of research and innovative activities in the country.

Article 50 bis of the Luxembourg income tax law – introduced by the above-mentioned law – provides for an exemption of 80% of the net positive income generated by the use or the right to use IP rights (copyrights on computer software, patents, trademarks, designs, models). The net positive income is defined as the gross income reduced by the amount of expenses directly related to income, including annual amortization and any depreciation. This exemption leads to an effective tax rate of maximum 5.93% (20% x 29.63%) in Luxembourg City.

The taxpayer who has himself created a patent and uses it in the course of his business is also entitled to a deduction equal to 80% of the net positive income (as described above) which he would have derived from, should he have conceded the use of this right to a third party. The introduction of such a notional deduction is very beneficial to those taxpayers concerned, although it should be noted that the benefit of this provision is limited to patents.

Capital gains deriving from the disposal of above-mentioned rights are also exempt up to 80%. However, the capital gain exemption does not apply to the extent of expenses directly connected with the IP (including amortization and depreciation) that have reduced the taxable base during the year of the disposal or any previous year.

To benefit from such a tax regime:

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