Temporary and permanent exemption of innovation income for loss-making companies
Temporary and permanent exemption of innovation income for loss-making companies
Principle
A company that applies for an intellectual property right (e.g., a patent) during year N and in the context of the innovation income deduction generates net income from innovation in the same year is likely to benefit from a temporary exemption from corporate income tax. This provided that the condition of intangibility is met.
In case the company acquires the intellectual property right in year N+1, the temporary exemption becomes permanent. This permanent exemption results in an increase of the opening reserves position, which compensates for the recovery of the tax-free reserve.
What happens if the company is loss-making in year N and N+1?
Assuming that the company is loss-making in year N and N+1 and realises a profit in year N+2, it cannot benefit from an exemption in year N or N+1. Both the temporary and permanent exemption will in that case be carried forward to year N+2.
In year N, the company does not have sufficient profits, so the temporary exemption cannot be applied. Consequently, the question arises whether or not a tax-free reserve should be booked in year N to meet the intangibility condition.
Solution adopted by the FPS Finance
The tax administration is of the opinion that, in the absence of profits in year N, no tax-free reserve should be booked in year N. Also, in the absence of profits in year N+1, no definitive exemption takes place in year N+1.
The follow-up of these temporary and definitive exemption carry-overs should only be done via the 275 INNO statement.
In year N+2, the definitive exemption carried forward can be taken into account through the increase in the opening reserves position.
Example
- Year N : Company X has a loss of 100 and already has positive net innovation income relating to a patent application, generating a potential temporary exemption of 50. Can company X set up an exempt reserve of 50 even if it has insufficient profits?
The administration replies that there is no need to create an exempt reserve in this case. In any case, this temporary exemption will be carried forward (via Form 275 INNO) to year N+1.
- Year N+1: Company X obtains the patent in year N+1, but incurs a new loss of 150 and this time generates a potential interest income deduction of 75.
Concerning the carry-over of the temporary exemption of year N (50): the intellectual property right was acquired and the temporary exemption becomes final. In the absence of profit, this final exemption is postponed. The same applies to the innovation income deduction for the year N+1 (75).
Both the carry-over of the definitive exemption (50) as well as the carry-over of the innovation income deduction for year N+1(75) will only be taking place via Form 275 INNO.
- Year N+2: Company X makes a profit of 200. The temporary exemption that became final in year N+1 and which was carried forward is realized by increasing the opening reserves position in year N+2 by 50.
The innovation deduction carried forward for the year N+1 can also be deducted by including it in the tax return.