The Luxembourg IP regime adopts the OECD’s nexus approach, linking tax advantages explicitly to Research & Development (R&D) activities conducted by a taxpayer. Essentially, the more a company invests in its own R&D, the greater the tax benefit. This ensures only those actively engaged in innovation receive preferential treatment.

The central formula calculates the proportion of qualifying expenditures to the total expenditures, applying this ratio to tax-eligible IP income. This ensures benefits are directly tied to innovation efforts.

Article of the Luxembourg’s Income Tax Law (LITL), providesa 80% tax exemption on net income derived from qualifying IP assets. This exemption extends to various income sources, including licensing, sales, embedded IP income and indemnities for qualifying IP.

Under the revised regime, qualifying assets include patents, utility models, supplementary protection certificates for pharmaceuticals, plant breeders' rights, and copyrighted software. Excluded are marketing-related intangibles, such as trademarks and domain names. To be suitable, the IP must develop out of R&D activities carried out by the taxpayer.

• Qualifying expenditures: Costs linked to R&D explicitly contributing to the creation or enhancement of an eligible IP asset. Outsourced activities are included only if conducted by unrelated entities.
• Overall expenditures: Includes all costs incurred for developing qualifying IP, even if outsourced to related parties, but acquisition costs, interests, and overheads remain excluded.

The Luxembourg IP regime ensures accurate net income determination through adjustments. Expenses unrelated to R&D or that do not directly benefit the IP asset are excluded. Taxpayers must track income and expenditures either by individual asset or in cases of complexity, by product group, ensuring compliance with arm's-length principles.

The Luxembourg IP regime disallows deferral of capital gains when sales proceeds are reinvested into qualifying IP under this regime, ensuring IP taxation rules remain distinct and purpose-driven.

The IP framework establishes rigorous compliance standards, particularly around tracking expenditures and income streams associated with qualifying IP. Companies must maintain detailed documentation to prove compliance and may need to upgrade internal systems to meet these requirements.

With enhanced tracking and heightened transparency, this regime encourages alignment of R&D efforts with tax advantages, rewarding genuine innovation. Businesses outsourcing R&D or distributing activities across multiple entities should revisit their strategies to optimise benefits.

The Luxembourg IP regime complex but presents significant opportunities for companies actively investing in R&D. By adhering to these requirements, businesses can benefit from substantial tax incentives while maintaining compliance with global standards.