In the framework of the Lisbon strategy for growth and employment in the EU, the Grand-Duchy of Luxembourg added Article 50bis to the Income Tax Act 1967 ("Loi concernant l'impôt sur le revenu du 4 décembre 1967" or "L.I.R.") at the end of 2007.
On the basis of this regime (the "50bis Regime"), Luxembourg undertakings and Luxembourg branches of foreign companies can benefit from an exemption of 80% on revenues (royalty fees...) derived from patent, trademark, design and domain name rights as well as from copyright on software, to the extent that such rights have been established or acquired after 31 December 2007. The exemption brings the effective tax rate for such revenues to approximately 5.85%.
The 50bis Regime has been further clarified by the Luxembourg Cour administrative, the highest administrative jurisdiction in Luxembourg that decides on appeal procedures brought against judgments of the Tribunal administratif.
On 30 July 2014, the Cour Administrative handed down its judgements in the Zeilt and the Zinc Alloy cases, holding that:
- revenues from trademark rights are eligible under the 50bis Regime as from the date of the trademark application (and not as from the date of definitive registration);
- license fees are eligible revenues under the 50bis Regime only when a licensee actually exploits the eligible IP rights on a given market; this is not the case where the licensee simply affixes the trademark on goods and sells them on to the licensor, who is moreover an intra-group company;
- cartoon characters do not benefit from design protection and fall outside the scope of the 50bis Regime.
These clarifications show that it is recommended to perform a more detailed analysis of eligible revenues, and more particularly from an IP law point of view, before relying on the 50bis Regime.
The Zeilt case
In the case at hand the Luxembourg tax administration refused to grant the exemption for revenues of the Luxembourg company Zeilt Productions S.à r.l., which also produced the Oscar winning animated short movie "Mr. Hublot". The revenues at hand were derived from unregistered designs related to several cartoon characters.
The tax administration considered that only designs, for which an application has been filed, are eligible for the 80% exemption, as the filing of an application would allow for an objective verification of the existence of the design rights.
Zeilt Productions S.à r.l. challenged this refusal before the Luxembourg Tribunal administratif. On 6 November 2013, the Tribunal administratif handed down a judgment in this case and held that nothing in Article 50bis L.I.R. prevents from granting the 80% exemption to revenues derived from designs for which no application was filed. The Tribunal administratif correctly based its judgment on Article 1.2.a) of Regulation (EC) No 6/2002 on Community designs, which confers indeed protection on unregistered designs as from the making available to the public.
The Cour administrative, however, overturned the judgment and held that the characters constituted copyright protected works (which do not fall within the scope of the 50bis Regime) rather than design protected works.
A design within the meaning of the Benelux Convention on Intellectual Property and Regulation (EC) n° 6/2002 is the "appearance" of a "product" whereby "product" means "any industrial or handicraft item."
The Cour administrative seemed to consider that computer created characters are not industrial or handicraft items and thus no products the appearance of which can be protected as a design.
Therefore, the Cour administrative had a restrictive interpretation of a "design" and a "product", an interpretation which is not supported by the broad definition of these concepts in the Benelux Convention on Intellectual Property (and Regulation (EC) n° 6/2002), which explicitly also includes less evident items such as "get-up, graphic symbols and typographic typefaces". Furthermore, it stems from the OHIM and other design search registers that several cartoon characters, such as the Ninja Turtles, enjoy design protection.
In the proceedings before the Cour administrative, the Luxembourg State (representing the tax authorities) argued that an undertaking seeking to benefit from the 50bis Regime must evidence the new and individual character of a design. This position cannot be upheld in the light of the judgment of 19 June 2014 in the case C-345/13 Karen Millen, where the European Court of Justice held that the right holder of a design "is not required to prove that it has individual character [...], but need only indicate [...] what, in his view, are the element or elements of the design concerned which give it its individual character".
The zinc alloy case
In order for the 50bis Regime to be applicable, the eligible IP rights must have been "established" or "acquired" by the Luxembourg undertaking or branch after 31 December 2007.
The Luxembourg tax administration issued Circular L.I.R. n° 50bis/1 ("Circular 50bis/1") whereby it clarified, amongst others, that for trademarks the date of establishment may be earlier if the undertaking concerned has already commercialised the relevant products, zinc alloys, under the sign concerned without filing an application for registration.
This point of view was challenged in a case where the Luxembourg tax authorities refused to grant the 80% exemption to a Luxembourg company for revenues derived from a name and a logo that was used before 31 December 2007 but was only filed for Benelux and Swiss trademark registration after that date.
On 27 June 2013, the Tribunal administratif handed down a judgment in this case. The Tribunal administratif held that Article 50bis L.I.R. did not prohibit granting the 80% exemption to undertakings that used a sign before 31 December 2007 but only filed a registration application afterwards.
The Cour administrative held that the date of the application for the trademark registration is the date of establishment of trademark rights (even when these are only definitively acquired on the date of registration) and equally the starting date for the eligibility of trademark related revenues under the 50bis Regime.
However, it refused to consider the relevant trademark licensee fees as eligible revenues under the 50bis regime. The Cour administrative held that the licensee only affixes the trademark on the zinc alloys and merely sells them on to the licensor, which is moreover an intra-group company. According to the Cour administrative the license fees do no constitute a remuneration for the right to use the trademark. In this respect the Cour administrative has a restrictive interpretation of the "right to use" the trademark, i.e., the usage of the trademark for the licensee's own purposes for the commercialisation of the products on the market covered by the trademark.
