27 August 2018 Belgian Tax Authorities publish FAQs on IP regime On 26 July 2018, the Belgian Tax Authorities published a list of Frequently Asked Questions (FAQs) on the application of the Belgian intellectual property (IP) regime, i.e., the innovation deduction.1 The innovation deduction entered into force on 1 July 2016 and takes into account the requirements of Action 5 of the OECD's2 Base Erosion and Profit Shifting (BEPS) Action Plan. The innovation deduction provides a deduction of 85% of the net qualifying IP income, resulting in an effective tax rate of 4.4% (2018-2019) and 3.8% (as from 2020).3 Further to some technical amendments to the regime in 2017, the FAQs provide useful guidance and practical insights on the application of the innovation deduction by taxpayers. Next to clarifications on the general (scope of) application of the incentive, the following questions are covered in the FAQs: - Should the IP be recorded on the balance sheet? Taxpayers are required to record the IP on the balance sheet (as intangible fixed assets) in accordance with Belgian accounting law.
- Should acquired IP be improved? The nexus ratio implicitly requires any acquired IP to be (partially) improved in order to benefit from the innovation deduction. In this respect, the FAQs clarify that taxpayers are required to evidence the added value generated by the improvement. Contrary to the previous IP regime, it is not required that the improvement of the IP takes place in a qualifying research and development (R&D) center.
- When does copyright protected software qualify? The FAQs confirm that software is automatically protected by virtue of Belgian copyright law provided it is an original work. A specific IP application or certification like a patent is not required. Copyright protected software qualifies for the innovation deduction, provided that the software results from an R&D project or program, as defined in the context of the partial payroll tax exemption for researchers. Regardless of whether the payroll tax exemption for researchers is effectively applied, taxpayers are required to obtain a binding opinion with the competent authorities (BELSPO) on the qualification of the software development as an R&D project or program.
- Does IP developed under a cost contribution arrangement qualify? The innovation deduction is available for Belgian resident companies and Belgian establishments of foreign companies, holding any (legal and/or economic) right to use the IP. This includes any economic entitlement as a result of the co-development of the IP under a cost contribution arrangement, even without formal legal ownership of the IP.
- Which types of income qualify? The innovation deduction applies to income falling within one of the following categories: license fees (fixed or variable), royalties embedded in the sales price of goods or services, income derived from process innovation, compensation for damages of IP infringement as well as capital gains. Further guidance is provided in the FAQs on the income covered by each category.
- How should the net IP income be determined? The innovation deduction applies to the net IP income, by deducting current- and prior-year expenditures related to the development of the IP from the gross IP income. The FAQs clarify that the impact of incentives reducing R&D expenditures (e.g., the payroll tax exemption for researchers) should not be taken into account for the netting of the IP income (nor in the calculation of the nexus ratio). In other words, the gross amount is to be taken into account. Examples on the deduction of prior-year expenditure are included in the FAQs.
- What is the impact of tax-neutral restructurings? Restructurings should not impact the application of the innovation income deduction. Specific guidance is provided on the transfer and allocation of excess deductions in the event of a (de)merger as well as the treatment of expenditure incurred before the restructuring.
- Which documentation requirements and formalities should be complied with? Taxpayers are generally required to keep all records that support the amount of the net-income and the nexus ratio, including for example a valuation of the fair market value of the IP that has been acquired from a related party. In order to claim the innovation deduction, a special form (275 INNO) is to be added to the corporate income tax return. Further guidance is provided as to when these formalities should be complied with.
- Can the innovation deduction be applied in combination with other R&D incentives? The FAQs confirm that a taxpayer is allowed to apply the innovation deduction in combination with other tax or non-tax related R&D incentives. In this respect, Belgium offers companies an attractive and comprehensive regime for R&D activities including:
- The R&D investment deduction (or the equivalent R&D tax credit) for qualifying investments in environmental friendly R&D and patents. The investment deduction is a tax deduction that can be claimed in addition to the annual depreciation expense of qualifying assets
- The partial payroll tax exemption of 80% for employing scientific researchers, engineers or other innovative personnel
- Incentives to employers for employing highly qualified foreign employees
- The beneficial tax regime for income received for the transfer of IP rights from employees to their employers
- Direct subsidies related to R&D and innovative projects
2 Organisation for Economic Co-operation and Development. 3 The innovation deduction applies to the following IP rights: (1) Patents and supplementary protection certificates, (2) copyright protected software, (3) orphan drug designations, (4) data and marketing exclusivity granted by the authorities and (5) plant breeders' rights. For additional information with respect to this Alert, please contact the following: - Steven Claes
steven.claes@be.ey.com - Peter Moreau
peter.moreau@be.ey.com - Arne Smeets
arne.smeets@be.ey.com
- Werner Huygen
werner.huygen@be.ey.com
Ernst & Young LLP, Belgian Tax Desk, New York - Max Van den Bergh
max.vandenbergh@ey.com
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ATTACHMENT PDF version of this Tax Alert Document ID: 2018-6011 |
