Innovation income deduction - decision tree

Asses if your company is eligible for tax incentive

As companies accelerate their digital footprint in the wake of the digital revolution and the rise of artificial intelligence (AI), understanding the implications of innovation tax deductions becomes increasingly crucial. Innovation income deduction (‘IID’) is one of the tax incentives that can benefit companies developing software projects.

To assess if your company is eligible for this tax incentive for software projects, we created a quick and easy decision tree which serves as a valuable tool.

For more detailed explanations about the innovative income deduction and its applications, read our previous article.

IID

1. Determine ownership

The first step is to examine the ownership of the software. For example, if the software is being developed by an external developer, it is essential to identify who holds the ownership rights; the developer or the client. Indeed, the IID may only benefit to the legal (co-)owner of the software. 

2. Analyse the R&D development structure

After confirming the legal ownership, you should check whether the software development was fully or partially outsourced to related parties, or if it was acquired. This assessment is crucial, as it may lead to a tax advantage of zero or a reduced amount, depending on how the R&D development is structured. 

3. Examine innovative aspects

The subsequent step involves examining the innovative features of the software. To qualify for IID, the software must adhere to specific criteria established by the Belspo platform.  

These criteria include: 

  • introducing new concepts or ideas,
  • having uncertain outcomes, 
  • producing replicable and transferable results, 
  • being systematically planned and budgeted. 

If the software fulfils all these requirements and is deemed innovative, you can proceed with the analysis. 

4. Check the deduction potential

Once all these steps have been cleared, it is now the time to determine what a third party would be willing to pay for the usage of your software, as this amount would be the basis for the tax advantages. Below are some key elements to already be able to screen and determine if the deduction amount would be worth it or could be considered as being too low.

For example, if the software is not exclusively used internally and lacks a significant revenue base, it may lead to a potential low deduction. On the other hand, if the software is developed for internal purposes, you should then analyse if the internal software is useful to most of the staff and how intensely it is used. 

A high level or intensity of usage can strengthen the argument for claiming the deduction, as it indicates that the software plays a significant role in your organisation’s operations. Additionally, it is important to be able to demonstrate that the software does not merely replace an old system without substantial improvement (otherwise this could also lead to a potential low deduction). 

Need personal guidance with your IID assessment?

If you have questions in light of this decision tree or need help assessing the eligibility of your company, our BDO experts are here to guide you. Once eligibility is determined, we can also help you through the next steps, including simulations of the resulting tax advantage and the effective implementation of the IID. 

The IID regime, originating from OECD initiatives, can be intricate in its implementation. By relying on BDO’s expertise, you can maximise the value of the outcomes produced by the steps described above. As the digital landscape continues to evolve, staying informed on these matters will be key to successfully navigating your business opportunities ahead.