As of July 1 2016, the net patent deduction has been replaced by an innovation income deduction.  It allows for a deduction of 85% for innovation related income. Various related measures were strengthened and expanded.  The implementation of this innovation income deduction has made Belgium the country of choice for businesses to conduct research and development.

Preface

The previous patent deduction did not meet the requirements of point 5 of the BEPS-action plan, according to the OECD (Organization for Economic Co-operationand Development).  The BEPS-action plan contains worldwide coordinated agreements to prevent tax evasion. Specifically, the action plan consists of 15 action points meant to prevent base erosion and profit shifting.

The patent deduction as it existed before July 1st 2016, left too much room for profit shifting. The goal of the new innovation income deduction is to only provide the tax advantages to the taxpayers who actually incur the research and development expenses.  The innovation income  deduction was implemented retroactively through the law of February 9th 2017.

The nexus fraction

The new innovation income deduction differs from the patent deduction in several ways.  Specifically, it sets forth two stricter measures. The first of these measures requires that the net-innovation-income is multiplied with the nexus fraction. The nexus fraction equals the qualifying expenses divided by the total (global) expenses.

Qualifying expenses are expenses incurred in the research and development which the business carried out itself, or which it outsourced to an unrelated business.  Qualifying expenses may be increased by 30% for purposes of applying the nexus fraction.

Global expenses are the expenses that the business has incurred or taken upon itself for the development of a patent. In other words:

  • expenses incurred for research and development of the intellectual property right that the business conducted itself;
  • expenses incurred for research and development of the intellectual property right that the business outsourced to an unrelated business;
  • expenses incurred in the request and acquisition of the intellectual property right; and
  • expenses incurred for research and development of the intellectual property right that were ‘outsourced’ by a related business.

Net income

The new innovation income deduction is calculated based on the taxpayer’s net income, unlike the patent deduction which was calculated on the gross income.  This is another way in which the regulation has become more stringent. The net innovation income is determined by deducting the global expenses from the gross income.

Ideally, the net-innovation-income is determined separately for each intellectual property right.  However, the law allows for a concession if this isn’t possible; in that case, the net-innovation-income may be determined per group of products.

The nexus fraction is applied differently depending on the way in which the net-innovation-income is determined. Normally, the nexus fraction is applied separately for each individual property right; but, it may exceptionally be applied per group of products.

Expanded scope of applicability

The scope of applicability  was expanded, in compensation for the stringent regulations outlined above. The most important is the expansion of the material scope of applicability. This is one of the reasons that this deduction is considered ‘new’ and is referred to as the “new innovation deduction”.

The expansion of the material scope of applicability means that the deduction is no longer limited to the income from patents and thereto belonging certificates. The new income innovation deduction also applies to income from breeders’ rights, orphan drugs, data-or market exclusivity and computer software with author protection rights.

The concept “patent income” was also expanded. Under the new regulations, reimbursement for damages due to the violation of an intellectual property right and amounts received due to the alienation of an intellectual property right, are also considered innovation income.

Temporary exemption

The new innovation income deduction allows one to take advantage of the exemption from the moment a request for an eligible intellectual property right has been submitted.  In other words, one is no longer required to already have the intellectual property right, prior to using the deduction. This is a significant change for businesses. This is considered to be a temporary exemption, due to the fact that the request is still awaiting review. As soon as the request is approved, the temporary exemption is converted into a permanent exemption.

Retention of the deduction

The new innovation income deduction provides two additional important changes. As of July 1, 2016, the deduction will no longer be lost as a result of a tax-free contribution, fusion, a company split, or similar transaction. Additionally, deduction surpluses may be carried over to the next taxable period.

Unused deductions no longer get lost.

Transitional provisions

The new innovation income deduction is applicable retroactively. The innovation income deduction is applicable to innovation income as of July 1, 2016, despite the fact that it did not become a law until February 9, 2017. Regardless, the legislator has also provided a transitional provision. As such, the patent deduction may still be applied to patent-income obtained until and including June 30, 2012. This patent deduction has to be obtained through self-developed patents that were requested before July 1, 2016, or through improved patents and licensing rights that were actually obtained before July 1, 2016.

In addition to these conditions, the legislator also implemented an anti-misuse provision. As a result, the transitional provision is not applicable to patents obtained directly or indirectly by a related company, when the company carrying over the income would not itself benefit from a patent- or similar deduction in its country. The legislator hereby attempts to prevent profit shifting through use of the transitional provision.

Conclusion

Upon comparing the stricter measures and expansions, we can conclude that the new innovation income deduction is a valuable change.

Especially the expansion of the applicable scope will result in new opportunities for many businesses. The new innovation income deduction stimulates research and development in Belgium.

Although Belgium is known for its high taxes, this very generous tax regime highlights its progressive approach in this area.