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The Law of April 17, 2018 therefore lays down a new framework of tax incentives for research and development activities aimed at consolidating a competitive framework for innovation in Luxembourg.

According to data published by the European Patent Office and the European Union Intellectual Property Office, IPR-intensive activity sectors accounted for 42% of GDP and 27.8% of direct jobs (or 60 million employees) in the European Union between 2011 and 2013.

As with the previous intellectual property regime, the new provisions provide for an exemption from income tax of 80% of the amount of adjusted and compensated net eligible income.

However, the field has been restricted to patents (in the broad sense) and computer software. Trademarks and domain names are no longer on the list of eligible assets.

Substantial activity and eligible expenditure

Moreover, for a company to benefit from this partial tax exemption, it must justify substantial R&D activities (that is to say that it makes eligible expenses directly related to income from intellectual property rights) and that it has itself borne the costs of R&D. Thus, profits are taxed directly in the country where value creation has occurred and cannot be artificially transferred to other countries.

Article 50ter nevertheless allows companies with their head office in Luxembourg to carry out their R&D activities in a permanent establishment located in another country of the European Economic Area, on the condition, in particular, that R&D expenditure is allocated to them under a preventative double taxation treaty.

The level of the amount that may be partially exempted depends on the extent of the R&D activities undertaken by that company and is determined by the level of eligible expenditure actually incurred.

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