Luxembourg, officially the Grand Duchy of Luxembourg, is a landlocked country in Western Europe. It borders with Belgium, France and Germany. Luxembourg has three official languages, namely, Luxembourgish, French and German. The country is a member of the EU, the NATO, and the EUR zone.
This is an ordinary Luxembourg company such as a SARL (Limited Liability Company) but with Articles of Association which specify that it is an IP company which will derive revenue from intellectual property rights. The IP regime of Luxembourg covers a very broad portfolio of intellectual property rights and it’s certainly not limited to patents. It also covers domain names, knowhow, trademarks, designs, models, copyrights, trade secrets, industrial design rights, and so on.
Usually, a Luxembourg company pays around 29.22% corporation tax. But – wait for it, here it comes – the net income connected with such IP rights (for example when exploiting a sub licence) enjoys an 80% exemption of the corporate income tax. In other words, one pays a maximum effective tax rate of 5.8% on such IP income. Net income under this IP regime is the difference between the gross revenue from the IP right and any expenses directly related to the intellectual property rights, including the annual write-offs and, where appropriate, the deduction of losses. When an IP company sells qualifying IP rights with a profit, then the 80% exemption also applies to these realised capital gains.
But there’s more: the 80% tax exemption also applies to companies which don’t commercialise the IP they’ve developed. For example, a company which registered a patent to be used in connection with its own activities (selling goods or services for example) is also entitled to an 80% tax exemption of the (fictional) net income that would have been received if the use of the IP right had been licensed to an unrelated third party! This provides many opportunities. In such a case, the arbitrary net income is reduced by all the expenses directly related to the IP, including the annual write-offs and, if any, the deduction of losses.
The 80% tax exemption only applies to IP rights acquired or instituted after the 31st of December 2007. Furthermore, it’s important to know that the 80% tax exemption only applies to revenues from IP rights which haven’t been acquired from a related company. Related companies are defined as parent companies (that directly own at least 10% of the share capital of the Luxembourg IP company), subsidiaries (in which the Luxembourg IP company holds directly at least 10% of the share capital) and sister companies (as long as at least 10% of their share capital is directly owned by the same parent company). Of course, clever tax consultants know how to circumvent these restrictions if necessary.
Big multinationals such as Amazon, Skype, iTunes (subsidiary of Apple), Paypal, Millicom, Rakuten, Rovi, DuPont Teijin Films, RTL Group, Delphi Powertrain Systems, ArcelorMittal, Performance Fibers, etc. established their European headquarters in Luxembourg. Now you understand why (of course, other factors also influence the decision to establish European headquarters in Luxembourg, such as being located in the heart of Europe, the favourable Value Added Tax rates and the highly skilled multi-lingual workforce).
It’s fun to know that a Luxembourg company (even such an IP company) can still be established with bearer shares. This opens perspectives with regard to discretion. It doesn’t always need to be fiscally motivated, but imagine that you wish to license a specific invention to a competitor, also in this case you have an interest in absolute discretion. This is still possible in Luxembourg, and it seems unlikely that this will change soon. The additional fact that Luxembourg has a DTAA (Double Taxation Avoidance Agreement) with Hong Kong provides many more opportunities.
For inventions, however, there are many other creative possibilities which should be analysed on a case-by-case basis. Obviously, we cannot illustrate all these opportunities here. But Luxembourg is a nice and credible option and the fact that one can work with bearer shares is an additional advantage which comes in very handy. A fiduciary service provider incorporates the company and then simply transfers the bearer shares by handing over the certificate(s) to the ultimate beneficial owner(s) of the company or an intermediary. If you want bearer shares in Luxembourg, then you must choose a public company limited by shares (Société Anonyme) and you must ensure a fully paid-up share capital of EUR 31,000.