How can Luxembourg position itself to competitively attract intellectual titles and activities? A recent AMCHAM IP Seminar is only one of the many initiatives undertaken by a diverse forum determined to turn Luxembourg into an IP Hub.

"Ideas are to the information age what the physical environment was to the industrial one: the raw material of economic progress" (Cukier, The Economist, 2005)

Good ideas (a simplified definition of Intellectual Property) are fuel-ling the new economy. They have always borne the potential to turn a profit. But in this day and age, coming up with a good idea - and licen-sing it and all future rights for its use - are two very different things.

The AMCHAM IP Seminar held in January 2006 was just one in a calendar of events envisioned by a forum of working groups from various industries determined to turn Luxembourg into an IP Hub. This forum has already undertaken an extensive SWOT (strength, weaknesses, opportunities and threats) analysis of Luxembourg as an IP destination, conducted an Evaluserve market research study, and presented their findings to the Luxembourg government. (presentations at www.amcham.lu).

Ian Whitecourt (Vice-Chairman of AMCHAM) and Hedda Pahlson-Moller (Managing Director of Evalueserve Benelux/OMSINT) worked together with David Roach and Serge Saussoy of PricewaterhouseCoopers to prepare the IP Seminar. Their goal was to present their findings and raise awareness about the amount of value that intellectual capital could generate for companies, and the considerable tax benefits to be gained in consolidating and migrating IP portfolios.

Parallel IP projects currently running in Luxembourg include a biotech study at the CRP Santé, the Haiti project at the CRP Henri Tudor, and LIASIT. In the opinion of the IP Forum, there could be a lot more. "Luxembourg is well positioned to compete for this new type of investment. The aim of the IP Seminar was to introduce some of the advantages of this opportunity and challenge for the Grand Duchy."

The legal perspective was outlined by Katia Manhaeve (Allen & Overy), the fiscal perspective by Valery Civilio (PWC), and the operations perspective by P-Moller. Jeannot Krecké, Minister of the Economy, gave a rousing speech at the end of the presentations urging people to realise the importance of IP as a bankable asset.

Legal and Fiscal Perspectives

"The purpose of the IP seminar is to put Luxembourg on the map as an IP destination," announced Whitecourt. Manhaeve pointed out some legal issues that arise when a (foreign) company decides to transfer the ownership of its IP to Luxembourg or to create new IP in Luxembourg, e.g. through research and development activities.

IP is protected by national legislation and international treaties. Theterritorial nature of IP rights should not be forgotten. Hence, when people want to know whether their IP rights will be well protected in Luxembourg after a transfer of ownership, Manhaeve answers that such a question may not always be relevant. In an international portfolio of IP rights, each IP right will be protected by the legislation of its country of origin. A Mexican trademark will be protected by Mexican legislation, even if the owner of that trademark is a Luxembourg company.

As to the Luxembourg legislation, Manhaeve points out that it is, in general, very complete and undergoes regular changes, mainly as a result of the increasing European and international harmonisation in this area. Some issues remain to be solved to create a comprehensive legal framework for the attraction and maintenance of IP. One of the perceived obstacles is the uncertainty surrounding security over IP rights in certain areas.

The registration and legal costs incurred when transferring IP to Luxembourg are not higher than in many other countries. Nevertheless, neighbouring countries have established legal and tax frameworks that allow them to profit more readily from IP. According to the Evaluserve study, "from a cursory overview of registered IP within Europe, it appears that the Netherlands, Switzerland, and perhaps Ireland have taken the lead in Europe in taking advantage of this world-wide business."

The Luxembourg government must overcome these obstacles and offer public incentives to further promote R&D in the country. On a private level, corporations can encourage innovation and ensure that their employees are effectively safeguarding IPR.

Civilio demonstrated that tax is an area that is perhaps the most complex in terms of what can be achieved, but also potentially attractive in terms of offering incentives to promote the development of IP.

The taxation of IP is a tricky area, partly because the valuation of IP is so difficult. A patent"s value can lie in its licences, or in its two primary revenue areas, its core technology or litigation. IP is highly volatile. Because it is intangible, it is readily moveable. It is highly tax sensitive (royalties and capital gains have to be calculated and IP can generate revenue for years).

Fiscally, there are still some barriers in Luxembourg. These include capital duty, net wealth tax, the relatively high tax rates (effective tax rates), and capital gain taxation (exit tax).

Putting Luxembourg on the short list

In trying to correctly position Luxembourg, the forum looked at what the competition is offering, and asked, "Why is Luxembourg not on the short list as an attractive IP centre'" Tax barriers were the big differentiator. Other countries lure IP by offering a more attractive fiscal environment. Switzerland offers a low effective tax rate. Ireland offers a low statutory tax rate. What can Luxembourg do?

P-Moller presented some possibilities that the working group feels are priorities. "We need to fix the tax situation." For example, call on Luxembourg to abolish (or cap) capital duty and abolish net wealth tax.

Other possible avenues include reducing the statutory tax rate on IP income, extending the tax credit to attract new players, initiating a notional interest deduction to ease the problems upon exit, and revising Luxembourg commercial law to permit a step up in value.

Minister Krecke gave a glowing endorsement for Whitecourt"s initiative and the joint effort of forum members who dedicated time and resources to promote Luxembourg as an IP Hub. "Thank you to everyone who has taken an initiative on this," he said, "It fits in perfectly with our strategies."

Many companies are not even aware that this is important to them. Although Krecke pointed out that, "Inside our Ministry we are totally committed to this," it was evident from his speech that even within other Ministries, as with the general public, people are not aware of how important IP could be for Luxembourg.

At the Lisbon European Council (March 2000), the E.U. set itself a new strategic goal for the next decade, "to become the most competitive and dynamic knowledge-based economy in the world." "Knowledge" is the buzzword that economists are using as the next best direction for the Luxembourg economy.

The Luxembourg economy in the 20th century has been a bit of a "one trick pony". The country"s prosperity was formerly based on a monolith of steel manufacturing. "Following the crisis in the iron and steel sector and owing to the success of the financial sector, Luxembourg changed from a highly industrialised country into a services economy at a rate unprecedented in the OECD area." (source: statec.lu). Arcelor is still a significant presence in Luxembourg, but the company shifted its main aim from steel production towards "offering technologically advanced steel solutions to its customers", thus moving from production closer to knowledge. In the space of a decade, the Luxembourg economy was essentially transformed from one monolith to another- from an industrial economy dominated by the steel industry to a services economy, with the financial market emerging to take the dominant place.

The Luxembourg Financial Centre has also been forced to reassess its direction fast in light of a string of events that rocked the local (and global) economy, albeit not always evident in the short term - the dot com crash (2000), the resulting market downturn, September 11 (2001) and its ripple effect of anti money laundering regulations, corporate and accountability scandals (Enron...), and reactionary regulation in the form of acts such as Sarbannes Oxley, Basel II, etc.

Diversification of the economy and a new direction to make Luxembourg competitive are now of paramount importance. The realisation of how important this is has only come fairly recently. Krecke said, "In 2000 we were very optimistic about the Lisbon Treaty. By mid review we had to admit that we had failed by missing the train on R&D. We must once again re-launch this whole idea."

Banking Intellectual Property

If Luxembourg wants to reposition itself as an IP and R&D centre, banking that knowledge must be at the top of the priority list. It is no good coming up with ideas that other countries profit from. It is not enough to lure top researchers and developers to Luxembourg. The conditions have to be attractive enough to make people stay. "There are a number of criteria we need to consider to promote Luxembourg. This is a strategic issue."

Luxembourg is investing heavily in a knowledge infrastructure, as evidenced in the new university, but knowledge in itself won't be enough to position Luxembourg at the top of the IP food chain. Luxembourg must seek ways to translate the "intangible" value of intellectual assets into revenue, must realise benefits from the investment it puts into the R&D that fosters IP, and must protect that IP togain a competitive edge against other countries.

"We will see a demographic shift from products that are created here," said Krecke, to ideas that are formulated here. A shift from the tangible to the intangible. "How can we bring this about and foster an inventive strategy approach'"

It is important for Luxembourg to promote itself as an IP Hub. It is also important for people to be aware of the value of IP and to spring into action to improve certain areas. There is still a lack of specialised resources such as a stronger scientific environment. The university will play a critical role here.

"We need credibility," was Krecke"s argument. "As long as we argue about where the university is to be established, we are missing the point. The important issue is to get the university going. We need more specialised training. We don't have a culture of lifelong learning in this country."

Luxembourg also needs better production facilities and a supporting infrastructure. "We need to digitalise all of our patents, he said. "We are not credible until we can get this community patent." Although the CRP Henri Tudor is studying patent activities, Luxembourg needs to be more forward looking, and "pushier" so the country doesn't lose valuable IP opportunities to other countries.

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Innovation scoreboard: Summary of Luxembourg results

Luxembourg ranks 10th out of the 25 EU countries. Luxembourg"s best performance is in IPR, which could be linked to above average performance in business R&D. Its performance in applications ranges from very poor for new-to-market product sales and for employment in medium-high and high tech manufacturing, to far above the EU average for high tech exports. Many of the trend indicators are missing, but Luxembourg"s trend performance on most available indicators is at or below the EU average.

The exceptions are a rapid increase in the broadband penetration rate and high tech exports. The two main challenges are poor performance on education and on public R&D. For an advanced economy, Luxembourg has a lower than expected performance in tertiary education and lifelong learning. The exceptionally low score for the supply of S&E graduates (18% of the EU average) is likely due to the fact that Luxembourg lacked a university until recently, with most citizens receiving a tertiary education abroad. Public R&D expenditures are very low, at only 29% of the EU average.

Innovation performance observed in the 25 Member States by the European Commission. To view the 2006 results for all Member States: www.europa.eu.int.