Belgian tax incentives - The innovation income deduction

Since 1 July 2016, this support measure targets innovative companies for the development of services, goods or software.

Are you planning to launch a project and wonder when and how the innovation income deduction applies?

1. Intellectual property rights eligible for deduction

Unlike the previous scheme, being the deduction for patent income which was repealed on 1 July 2021, the innovation income deduction has a broad scope. Indeed, this deduction applies to patents, plant breeders' rights, data or market exclusivity, orphan drugs and copyright-protected computer software.

For the latter category, you must be able to demonstrate that they result from a research and development project or programme. A binding opinion on this can be requested from Belspo.

2. Approach based on net income

The innovation income deduction is calculated on the basis of net income, i.e. gross income less all research and development (R&D) costs of the intellectual property right in question.

In addition to R&D costs for the said financial year, historical costs, i.e. relating to previous financial years ending on or after 1 July 2016, must also be taken into account.

To determine gross innovation revenue, we can use several methods.  On the one hand, a market approach based on comparable transactions involving similar intellectual property rights. On the other hand, a revenue approach based on the company’s ability to generate revenue from the intellectual property right in question.

3. The Nexus ratio

Before embarking on an innovative project, it is essential to determine where the R&D activities will be carried out within the group.

For an optimal application of the deduction, it is important that these activities take place – where possible – in the company that will own the intellectual property rights. Although you can rely on third parties, the fact that an affiliated company is re-invoicing R&D-related services can have a negative impact on the deduction.

The aim of the Nexus ratio is to limit the deduction depending on the nature of the expenses incurred by the company in developing the intellectual property. For example, the deduction could be limited if the company carries out a lot of research and development via an affiliated company or if it has acquired the intellectual property without having carried out any in-house development itself (via its own payroll).


 

4. The deduction rate

The deduction that can be applied is 85% of the net innovation income after applying the Nexus ratio.

5. Importance of the deduction for innovation income

Because it allows to significantly reduce the tax burden, the innovation income deduction has been used by many taxpayers in recent years. This growing interest has been noticed by the tax authorities. Consequently, tax audits on the correct application of this measure have increased.

Given the complexity of the measure, it is strongly recommended to prepare a note justifying and validating the various aspects of the deduction. Many companies also apply for a ruling to get legal certainty on the valuation of the gross innovation income.


BDO can help you assess whether the deduction can be applied and can support you in the implementation process (e.g. request for a ruling). Please contact your trusted BDO advisor or one of our experts, Laura Dewez or Gaëlle Pirenne.