Reform of the Belgian patent box regime: new innovation box in the pipeline

The Belgian government has recently introduced in Parliament a draft bill on urgent tax measures. This draft bill aims to, amongst others, abolish the Belgian patent income deduction regime as from 1 July 2016.

The abolishment of this favourable regime, on the basis of which enterprises were allowed to deduct 80% of the income derived from patents from their taxable basis, is a direct consequence of the OECD recommendations that were made in the framework of Action 5 of the BEPS action plan. In its final report on this specific action point, the OECD has considered the ‘Patent Box’ regimes of about fifteen countries (including Belgium, Luxembourg, and the Netherlands) to be harmful tax practices, which has therefore urged several of these countries to adapt their respective regimes.

The abolition of the Belgian ‘Patent Box’ regime has effectively entered into force on 1 July 2016, but it will be accompanied by a transitory regime of five years. Under this optional transitory regime, enterprises will have the right to apply, or continue to apply, the 80% patent income deduction until 30 June 2021 with regard to income derived from: (i) patents that have been obtained before 1 July 2016 and for which the “old” patent income deduction has already been applied, (ii) patents that have been applied for before 1 July 2016 but are only effectively obtained after that date, or (iii) patents that have been acquired from another party before 1 July 2016 and of which the patented products and processes have been improved after this date.

Even though no draft bill has yet been introduced in this respect at this time, the Belgian government intends to provide for a new tax incentive for innovation income with retroactive effect as from 1 July 2016. This new regime will coexist with the old patent box regime during the aforementioned five year transitory period. On the basis of the currently available information, the key characteristics of the new regime appear to be as follows:

The new regime will have certain limitations that the old regime did not have …

  • Income from qualifying IP assets will only be able to benefit from the new tax incentive if the relevant enterprise has incurred qualifying expenses by itself relating to the development of those IP assets. Under this so-called “nexus approach”, enterprises will only be able to apply the new favourable tax regime if they have a sufficient level of substance in terms of R&D activities conducted with a view to creating qualifying IP rights.
  • The deduction will only apply to the net amount of qualifying IP income, and will thus not be applied on a gross basis.

… but will equally have certain advantages when compared to the old regime

  • The scope of the new regime should be substantially broader than the scope of the “old” patent income deduction. Besides patents, the regime would equally apply to, e.g., copyright- protected software, plant breeders’ rights, and orphan drug designations.
  • The applicable deduction rate would be increased to 90% or 100%.
  • Possibly, enterprises would be allowed to carry the deduction forward to the following accounting years if there are insufficient taxable profits.

This new regime will thus allow companies that were not eligible for the “old” patent income deduction (mainly companies that are active in technological innovation for software development) to now also benefit from an interesting tax incentive. The introduction of this new regime might also require certain companies to structure or restructure their R&D activities with a view to maximising the tax advantage they can obtain thereunder.