The law of 27 April 2007 allows companies to deduct from their Belgian taxable base 80% of royalties received under patents resulting from R&D efforts. Unlike other countries, there is no cap on this deduction and the R&D does not necessarily have to be performed in Belgium. This tax incentive will no doubt substantially enhance the competitive edge of Belgian companies and branch offices with substantial R&D activities.
Scope of the tax exemption
The law will be applicable to income under Belgian or foreign patents (or assimilated licensing rights) owned by Belgian companies or Belgian branches of foreign companies.
The new legislation makes a distinction between two categories of patents (or assimilated licensing rights) whose royalty income can benefit from the tax deduction:
(i) patents or supplementary protection certificates (“SPCs”) developed entirely or partially by the company or one of its “branches of activity”;
(ii) patents or SPCs acquired from a third party, as well as licenses granted by third parties on their own patents. The only requirement is that the entity claiming the deduction has performed research and/or development efforts improving entirely or partially the patented product or process in one of its own research centres, whether in Belgium or abroad.
It should be noted that income derived from other IP rights such as know how, copyright, trademarks and model and design rights cannot benefit from this tax deduction. The Belgian authorities seem to take the position that R&D can only be encouraged and be sufficiently valuable for a tax deduction when it leads to patentable inventions.
The deduction applies to income, whatever its nature, derived from (sub)licensing the patent; and this income must be earned on patents that are used for productive purposes by the Belgian company or the Belgian branch of a foreign company, or by another company but on its behalf. The “relevant” patent income should be evaluated in accordance with normal market conditions and should correspond to the income the company would have received should the patented product have been licensed to an independent third party. The 80% deduction will be applied on this theoretical income. In practice, this evaluation could lead to some difficulties and, at least in the implementation phase of the measure, to some degree of legal uncertainty.
The above mentioned income must be reduced by some costs or expenses before the 80% tax deduction is applied:
(i) any remuneration paid to third parties for patents. For patents and patent licenses acquired from third parties, the deduction is limited to the difference between the total patent income received and the remuneration paid to third parties; and
(ii) the annual depreciation on the investment value of the patents. As mentioned above, the deduction rate will be 80% of the patent income. This new tax incentive will decrease the maximum effective tax rate from 34% to 6.8% of the patent income. The tax advantage is not capped. After the 80% deduction, the remaining 20% of the patent income remain taxable, but other costs could further decrease the taxable base.
The deduction will be applicable from tax year 2008 (income received in 2007) onwards, but only on “new” patent income, i.e. income resulting from patents that were not used by the company, the licensee or related companies for sales of products or services to “independent” third parties prior to 1 January 2007.
Likely effects of the law
The proposed measures will certainly prompt companies to reassess the opportunity to patent their technological innovations.
It will also encourage the industry to value their patents, to arrange for transparent licensing and royalty flows, and to provide for a scheme that highlights which revenue can be allocated to which patents. The long term effect is not only a tax benefit: such a scheme will create transparency and credibility that will not only be useful for tax authorities, but also for potential investors and shareholders.
Clearly the assessment of indirect patent income will be subject to much discussion. The decision to limit this tax deduction to patents is probably inspired by pragmatic reasons but this too could raise questions.
In any event, these measures will draw attention to Belgium as a country where innovation and investment in intellectual property are encouraged in a number of ways. Where such encouragement is in the form of a tax break, this will be a highly attractive advantage to a wide audience. This Law is also likely to be a further incentive to consider Belgium as a very important jurisdiction for international tax planning purposes, especially for groups of companies.