New innovation deduction
On 2 February 2017 the Chamber of Representatives approved the Innovation Deduction ("ID") bill proposed by the Belgian Government.
The new ID is to replace the "patent income deduction" or PID. The PID was intended to encourage Belgian companies and Belgian permanent establishments from foreign companies to invest in technological innovation. In this respect, Belgian tax law provided, as of tax year 2008, the possibility to deduct 80% of the gross patent income from the taxable corporate income tax base. As a result, the effective corporate income tax rate on the concerned patent income was reduced to 6.8%.
The PID regime has come under increased pressure from the BEPS action plan launched in 2013 by the OECD. In order to comply with the principles included in the BEPS action plan, the Belgian Government decided to abolish the PID regime as of 1 July 2016. There will be a transitional period for the current PID schemes until 30 June 2021 in order to allow a smooth transition to a new tax regime.
The most important rules of the new ID regime can be summarized as follows.Qualifying incomeThe new ID regime allows an 85% corporate income tax deduction of the net income resulting from innovation investments.
More specifically, the new ID regime will apply retroactively and as of July 2016 on patent income and on supplementary protection certificates. The ID regime will however also apply on plant breeders’ rights, orphan drugs and data or market exclusivity granted by a public authority. The new ID regime will also apply on computer programs which are protected by a copyright, if these computer programs result from an R&D project or programs that qualify for an exemption of professional withholding taxes on scientific research.
Further, the company or permanent establishment seeking to apply the ID regime, needs to qualify as the legal (co-)owner, usufruct beneficiary, licensee, or intellectual property rights beneficiary of the rights or programs concerned, so it is not limited to the owners of such rights.
The new ID regime will apply on received or obtained license income and royalties, on intellectual property income embedded in products or services and in the application of product processes. The ID regime will also apply on damages received as compensation for patent intellectual property infringement and – subject to certain conditions – on capital gains realized on intellectual property rights.ID calculationThe new ID regime applies on the obtained or received net income. The net income needs to be calculated for each separate tax year and for each intellectual property right. To do so, the concerned gross income data need to be reduced by the R&D expenses which are directly attributable to the qualifying R&D expenses, by the expenses and costs for the acquisition of intellectual rights, and by the R&D costs supported by related and non-related companies.
The qualifying net income can then be tax deducted but only after applying a so-called "Nexus-ratio" (see below). The ID amounts which cannot be deducted from the corporate taxable income of a specific tax year can be transferred to subsequent tax years.
The ID regime only applies on intellectual property rights which are the result of R&D efforts and investments that the corporate taxpayers committed to, either by themselves, or by engaging non-related companies or third parties (such as universities or independent research centers). In order to quantify this tax deduction limitation, the law provides for a corrective fraction or "Nexus ratio" to be calculated on the net income which results from the deductions referred to above:
In the nominator, A refers to direct R&D costs borne by the corporate taxpayer, whilst B refers to costs related to the R&D outsourcing to a non-related party. C refers to R&D costs incurred by a related company, which costs are recharged to the corporate tax payer without any mark-up. The total amount of qualifying costs in the nominator may be increased by a maximum of 30%, without however exceeding the total amount of R&D costs.
The denominator includes all R&D costs, and therefore not only the costs sub A, B and C, but also the costs related to the acquisition of intellectual rights (D) and the R&D costs (E) borne by related companies (and not qualifying under (C) above).
As a result of the application of the Nexus fraction, it is quite clear that companies which invest in developing their own R&D (or entrust this task to non-related companies), obtain substantially more benefit from the new ID regime. On the other hand, the result of applying the Nexus fraction will lead to a decreased deductible ID to the extent that more intellectual property is acquired from third parties or from related companies, or to the extent that R&D efforts or investments are entrusted or subcontracted to related companies.
The law also provides that in very specific circumstances the corporate taxpayer can apply for a positive ruling from the Federal Ruling Committee, thus allowing deviation from the results obtained from applying the Nexus fraction. Application and formalitiesThe ID regime can be applied on R&D costs even if the intellectual property developed is still in the process of legal protection or registration. The corporate taxpayer in such case needs to establish a temporary tax-exempt reserve. As soon as legal protection or registration is obtained, the temporary reserve becomes a final tax-exempt reserve. Should the protection or registration be refused, the tax-exempt reserve procedure will become taxable.
In order to apply the ID regime, specific documentation is required. In this respect, a special form needs to be included with the corporate income tax return and the taxpayer needs to establish and keep a detailed documentation dossier including all documents and information on specific data, such as the actual value on acquired intellectual property rights, the calculation of the gross and net income, and the data used to calculate the Nexus fraction.
We remain at your disposal for any further questions.