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Tax changes introduced for 2008
Two Laws published on 27 December 2007 introduce a number of changes in the tax area effective 2008. We summarize below the measures that are relevant to international businesses.
a) Capital duty reduced to 0.5% as from 2008
Capital duty is reduced from 1% to 0.5% as from 1 January 2008. This tax is payable by companies upon incorporation and on capital increases. The intention is to phase out capital duty by the beginning of 2010, thereby bringing Luxembourg legislation into line with a proposal from the European Commission.
b) Investment tax credit increased by 2%
The investment tax credit (bonification pour investissement compl?mentaire) is raised from 10% to 12% as from 2008. This tax credit is available for investments in specific depreciable tangible fixed assets (excluding buildings). Together with the tax credit on new investment, Luxembourg enterprises will be able to take a total tax credit of up to 14%-20% on the value of their investments.
c) New tax legislation introduced for intellectual property
A new Article 50 bis in the LIR (Luxembourg Income Tax Law) envisages an 80% exemption on certain types of intellectual property ("IP") income as well as an 80% exemption on capital gains realized on the sale of such intellectual property.
The exemption applies to the net income paid to Luxembourg taxpayers (individuals or legal entities) for the use of any software copyright, any patent, trademark, design or model. Patents developed and used in-house may also generate a deemed income deduction under certain conditions. Net income is defined in the law as gross royalty income received by the taxpayer less the amount of expenses incurred in direct economic connection with this income, including annual depreciation charges and write-downs.
Capital gains realized on the disposal of IP also benefit from an 80% exemption. The gain remains taxable to the extent of the expenses incurred in direct connection with the income as well as depreciation charges and write-downs that have reduced the tax base of the taxpayer in the tax year of the disposal or in any previous tax year.
The exemption regime applies to registered patents, but only to the extent the IP is acquired (or created as the case may be) after 31 December 2007. Expenses incurred in direct economic connection with the IP must be recorded as an asset during the first year for which the exemption is claimed. Finally, the IP cannot be acquired from a person that is treated as an "affiliated company," and company A is treated as "affiliated" to company B within the meaning of the law if:
- A directly holds at least 10% of the share capital of B;
- B holds at least 10% of the share capital of A;
- At least 10% of the share capital of A and of B is directly held by a third company.
d) Taxation of individuals reduced
The tax brackets have been adjusted for inflation by up to a maximum of 6%.
e) Taxation of nonresidents: rental losses in connection with real estate located in a foreign country to be taken into account
In the wake of a judgment by the European Court of Justice on 18 July 2007, according to which the Luxembourg Income Tax Law was not compatible with the principle of free movement of workers, the scope of Article 157 ter of the LIR has been amended so that all foreign income will now be taken into account when calculating the applicable Luxembourg tax rate for certain nonresident taxpayers.
Indeed, the ECJ held that the former Luxembourg income tax rules were discriminatory as they allowed only resident taxpayers who owned real estate situated in another EU Member State to claim that related losses (for example interest charges on financing) be taken into account when calculating their Luxembourg average tax rate.
Nonresident taxpayers can now elect to be treated as resident taxpayers as soon as they derive at least 90% of their professional income from a Luxembourg source.