The new regime shows significant improvements comparing to the patent income deduction and has a broader scope. Also other intellectual property rights are taken into consideration, such as copyright-protected software. Moreover, the compensation stemming from the sale of intellectual property under certain conditions is considered income for the purposes of the new deduction.
The deduction of the new regime has increased from 80% to 85%.
The patent income deduction: OECD influences the Belgian regime
As of the fiscal year 2008, companies could consider 80% of the gross income to be exempted from corporate income tax. That implied a reduction of the effective tax rate for such an income to a maximum of 6.798% (20% of the normal corporate tax rate of 33.99%). The aim of this measure wass to stimulate innovation through research and development and to encourage its protection through patents.
Not all companies in Belgium were eligible for the patent income deduction. That is because the deduction is limited to patents. The software industry often fell out of scope because its intellectual property is rarely protected through patents.
Furthermore, companies had to wait for the acknowledgment of the patent before being able to apply the deduction.
On request of the OECD, Belgium has abolished the patent income deduction regulation and has replaced it with the innovation income deduction. The government has also provided, within the framework of the OECD guidelines, a transitional arrangement which allows companies to continue applying the old regime, under certain conditions, for five more tax years.
Transitional arrangements
Taxpayers can still apply the patent income deduction until 30 June 2021 for self-developed patents applied before 1 July 2016 and for improved patents and licenses on patents that were acquired before that date.
To prevent abuse, the transitional arrangement does not apply to patents that were acquired directly or indirectly after 1 January 2016 and which are not eligible for the patent income deduction (or a similar arrangement under foreign law) at the transferring company.
Entry into force
The new law takes effect retroactively from 1 July 2016.
FAQ
The practical impact of the new regime is illustrated through a number of “Frequently Asked Questions”
The new regime allows a tax deduction up to 85% of the net income from innovation in corporate income tax or non-resident income tax (companies).
The net income for innovation applies to intellectual property rights of which the company is the full owner, co-owner, usufructuary or license or rights holder:
- A patent or SPC (supplementary protection certificates);
- Plant variety rights, applied for as of 1 July 2016, or an established breeder’s right that is acquired after 30 June 2016;
- Orphan medicinal products, applied for as of 1 July 2016, or an acquired orphan medicinal product that is acquired after 30 June 2016;
- data or market exclusivity granted after 30 June 2016;
- Copyright-protected software, including derivatives or adaptation of an existing computer program resulting from a research and development project or program which did not produce any revenue before 1 July 2016.
The right to use the intellectual property is sufficient. The contribution made to the joint development of an intellectual property provides the right to the company in question to apply the innovation income deduction.
All marketing related intellectual property are excluded from the scope of the deduction for innovation income. The incomes for name, logos, shapes, ... to distinguish a product of a service, do not qualify. Also, utility models are not eligible for the innovation income deduction.
Belgian companies, and Belgian establishments of foreign companies can apply the new innovation income deduction for intellectual property rights assigned to a Belgian establishment.
The new deduction can be applied regardless of the country where the product, service or process is protected. Patent or other intellectual property rights may also be granted outside of Belgium or the EU.
Nature of the income
Innovation income may take the form of license fees, compensation to a judicial or arbitral decision, a court settlement or an insurance contract, or can be included in the selling price of the product or service that comes from the patent or breeder's right.
Timing
Companies that want to apply the new regime can only do this for IP income gained as of 1 July 2016. However, they can only include the cost of developing the IP from 30 June 2016.
Net innovation income
Under the innovation income deduction regime, only the net innovation income qualifies for the deduction scheme.
Net innovation income is the innovation income, reduced by the costs of the year, as well as the costs deriving from previous taxable periods, ending after 30 June 2016. Development costs of the financial years ending before 30 June 2016 need not be deducted;
- Development costs related to financial years ending before 30 June 2016, do not have to be deducted;
- Taxpayers are given the opportunity to spread the deduction of costs of previous financial years over a maximum period of seven tax periods;
- A negative balance will be carried forward to the next year.
To determine whether an expense is directly related to innovation income, the 'nature' of the costs is less important than the actual use.
Innovation income only qualifies for the new deduction scheme when included in the Belgian taxable result. The deduction does not apply to the income attributed to foreign permanent establishments.
Recharge of costs
Belgian companies that own patents but pass on R&D costs partially or entirely to group companies, have to deduct the recharged cost from the gross innovation income to determine the net innovation income.
The amounts resulting from the transfer of an intellectual property also qualify for the innovation income deduction. The entire sales price is considered to be the gross innovation income, but there are certain requirements:
- Intellectual property developed by the company should be realized ultimately in the last taxable period prior to that during which the intellectual property was transferred;
- If the company transfers previously acquired intellectual property (regardless of any improvement), the acquisition should have taken place ultimately in the last 24 months prior to the transfer;
- Finally, the compensation received is to be reinvested entirely in the company’s own R&D expenses for other intellectual property, and this within five years.
Like the patent income deduction scheme, the focus of the innovation income deduction is the level of economic activity in our country. Under the patent income deduction, substance was guaranteed by the requirement that the development or improvement of the patent be carried out in a research center (not applicable for SMEs). This condition has been abolished. Under the new regulation, the degree of substance is measured by the so-called "Nexus ratio '(see below).
IP development within a research center is, therefore, no longer required.
The Nexus ratio now is the only link with the substance.
Reporting in the corporate tax return
In the corporate income tax return, the processing of the innovation deduction comes after the dividend received deduction (DRD) but before the notional interest deduction, the deduction of previous tax losses and the investment deduction.
Excess deduction
The innovation income deduction that is not used can be carried forward to the subsequent assessment years. This was impossible under the patent income deduction scheme.
Calculation on a net basis
The new deduction applies to net innovation income (as opposed to the patent income deduction), and is calculated per fiscal year and per intellectual property.
Modified nexus approach
Both self-developed and intellectual property rights acquired externally are eligible for the innovation income deduction.
On OECD instruction, the nexus ratio needs to be calculated in order to determine the innovation income deduction. In application of this ratio, acquired intellectual property and research outsourced to related companies are excluded from the innovation income deduction.
Nexus ratio: a + b
a + b + c + d
a: R & D costs of the company
b: R & D costs of non-related companies
c: Expenditures for acquisition of IP
d: Costs for R & D that is outsourced to related companies
Costs related to interest payments, rental or ownership of a building or costs that do not represent research and development activities are excluded from the ratio. Expenses that have no direct link with intellectual property do not affect the Nexus ratio. They do not have to be deducted from the gross income deriving from intellectual property mentioned in the new legislation.
Basically the expenditures to be taken into account for the Nexus ratio are all expenses incurred during the lifetime of the intellectual property.
The numerator of the Nexus ratio is increased automatically by 30%, but the fraction must not be greater than 1. This way companies are not excessively penalized for outsourcing research and development to an affiliated company or to improve an acquired intellectual property.
More precisely:
Nexus ratio = qualifying R&D costs x 1.3
Overall R&D costs
Innovation income deduction = gross innovation income – R& D costs x Nexus ratio x 85%
If, due to exceptional circumstances, the Nexus ratio does not correspond to the ratio between the self-initiated and the outsourced R & D activities (non-qualifying expenses), the Nexus ratio may be replaced by a higher ratio. This, however, requires a ruling request at the federal Ruling Commission when the ratio reaches a minimum of 25% before the application of the 30% increase.
| |
2017 |
2018 |
2019 |
| Qualifying R&D costs |
300 |
200 |
100 |
| Other R&D costs |
100 |
100 |
0 |
| Total R&D cost |
400 |
300 |
100 |
| Innovation income |
100 |
800 |
2.000 |
| Total R&D cost |
-100 |
-300 |
-100 |
| Historical cost |
0 |
-300 |
0 |
| Net innovation income (1) |
0 |
200 |
1.900 |
|
Qualifying R&D cost x 130% (X)
|
390 |
650 |
780 |
| Total cost (Y) |
400 |
700 |
800 |
Parameters in this example:
2017
Let’s suppose a company has R&D costs of 400 in 2017 for the development of an intellectual property for which the company applied for a patent. Part of the R & D cost is qualifying (300 qualifying as R&D expense); another part (100) refers to the outsourcing to related companies of research and development and is not eligible.
Suppose that the company has borne all costs and that the innovation income amounts to 100 in 2017. This implies that the net innovation income is 0 for 2017 and that the innovation income deduction cannot be applied. The amount that could not be deducted may be transferred to 2018. We assume in this example that the company did not choose to spread the cost of R&D on seven years.
2018
In 2018, the company's R&D costs amount to 300 and the innovation income is 800. To determine the net innovation income, the company should deduct the cost of the current financial year, as well as the non-deducted cost from 2017.
In the second year the taxpayer has additional R&D expenses: 200 are qualifying and 100 are not. The net innovation income, therefore, amounts to 200. The Nexus ratio should then be determined on the basis of the eligible expenses of 2017 and 2018 in the nominator and in the denominator the total expenses of 2017 and 2018. The Nexus ratio amounts to 92.9% in 2018. The innovation income deduction can now be calculated by multiplying the 200 net innovation income by 92.9% and by 85%.
There are special documentation requirements for companies that want to apply the innovation income deduction. These requriements allows the tax authorities to determine whether the innovation income and the Nexus ratio have been applied correctly.
A form with all the elements to support the calculation of the subtraction is to join the corporate income tax return.
Enterprises (including SMEs) should have a documentation file for each intellectual property.
Taxpayers can apply in the same declaration both the patent income deduction and the deduction for innovation income, as long as this is not done for the same intellectual property.
During the transitional period, the patent income deduction regime can in fact still be applied for the patent income that will be obtained until 30 June 2021 for patents applied for before 1 July 2016 and for improved patents acquired before that date. However, for these patents, the taxpayer cannot switch to the innovation income deduction during the transition period. The application of the transition arrangement is an irreversible choice.
Mergers and demergers do not have an impact on the application of the innovation income deduction.
The excess innovation income deduction is transferred, without limitation, in case of a merger or a demerger.
A summary of the main differences between the old and new regime:
| |
Old regime |
New regime |
| Scope |
Patent income deduction
|
Innovation income deduction |
| Basis for exemption |
Gross income |
Net income |
| Deduction rate |
80% |
85% |
| From what moment is the deduction applied? |
From the moment the patent is granted |
As of patent application
Creation of an exempted reserve is required
|
|
Processing
in the tax return
|
Taxable profit after dividend received deduction
|
Taxable profit after dividend received deduction |
| Unused deduction transferable? |
No |
Yes |
| What about mergers and demergers? |
Unclear |
Applicable |
| Nexus restriction |
Not applicable (R&D requirement for non-SMEs)
|
Yes – Nexus restriction for acquired IP and payment for
R&D services to group companies
|
| Research center required? |
Yes (but not for SMEs) |
No - Substance is guaranteed by the Nexus formula |
| How to process in the tax return? |
Specific annex |
Specific annex |
| Track & Trace |
Income only |
Income and costs per IP and if not possible per product
or product group
All costs from previous taxable periods that end after
30 June 2016
|