The new innovation deduction

Under pressure from the BEPS ("Base Erosion and Profit Shifting") action plan of the OECD, the existing Belgian deduction for patent income was abolished in July 2016. The deduction was replaced by a new innovation deduction which is fully in line with international transparency and profit shifting rules.

The new innovation deduction represents a significant improvement in numerous areas compared with the previous patent deduction.

Scope

Unlike the patent deduction, the new deduction not only applies to patents, but also to  plant variety rights, orphan medicines, data or market exclusivity for plant protection products and (orphan) medicines and copyright protected computer programs. It is therefore no longer a question of "patent income" but "innovation income".

As was the case previously, trademarks and other marketing-related intellectual property rights are not eligible for the innovation deduction.

The deduction will now also be applicable in the context of mergers, demergers and equivalent transactions, which was not previously the case.

Moreover, a portion of the profits can be exempted as soon as the patent application has been submitted, even if the application is not yet approved. A temporary exemption from corporation tax is also provided for, pending the definitive approval. In the event that the application is refused, the temporarily exempted innovation income will become taxable.

Which innovation income?

The main categories of income are received licence fees and the included royalties. This last category pertains to fees which are payable to the company for goods or services which, provided by or on behalf of the company, would be provided by a third party pursuant to a licence granted by the company.

A third category of income is that of process income, i.e. income resulting from the use of a production process which is inextricably linked to the intellectual property rights.

Damage compensation due to a breach of an intellectual property right also qualifies as innovation income.

Fees from the disposal of an intellectual property right are likewise eligible for the tax deduction. In such cases, this must relate to activated intellectual property rights established in the previous taxable period, or acquired in the last 24 months. Furthermore, it is required that the sales price is reinvested within 5 years in internal research and development activities for other intellectual property rights.

Formula

The rate of the innovation deduction is 85% and any unused deduction can be carried forward to the subsequent taxable period without restriction.

Furthermore, the innovation deduction is no longer calculated on gross income, but on net income, and is limited by the so-called "Nexus approach":

85% x net innovation income x (qualifying expenditure for research and development x 1.3 / overall expenditure for research and development)

The qualifying expenditure for R&D relates to costs for R&D which was conducted by the company itself, or outsourced to independent third parties. The overall expenditure for R&D is the previously-mentioned qualifying expenditure multiplied by the expenditure on associated companies and the expenditure for the acquisition of intellectual property rights.

It is not only the expenditure from the financial year itself which must be taken into account, but also that of the previous financial years. In other words, it is a cumulative application.

Implementation

The new law is retroactively applicable from 1 July 2016.

A transitional arrangement is planned up to and including 30 June 2021. For patents awarded or applied for before 1 July 2016, or improvements of patented products or processes of patents or licence rights acquired before this date, the previous patent deduction can still be applied.

It is therefore a question of making a choice, and bear in mind that this choice is irrevocable for all taxable periods which end before
July 1st, 2021.