As from 1 July 2016, the existing Belgian patent income deduction (‘PID’) regime has been abolished (Official Gazette of 11 August 2016, 2nd ed.). Indeed, in line with the so-called ‘modified’ nexus approach, the current patent box regime had to be replaced with a BEPS (in particular Action Point 5 of the OECD BEPS Action Plan)/EU compliant patent box regime. Subject to conditions, the existing regime is grandfathered for five years.
Currently, the Belgian government is working on such a new compliant regime. No final ‘draft law’ is available yet (expected in the course of September 2016, ultimately before year-end), so the below can still be subject to changes.
In contrast to the existing PID regime, the qualifying patent/innovation income will be calculated on a net basis. The percentage of this deduction will be raised from 80% under the existing PID regime to 90% under the proposed regime. The new regime is envisaged to enter into force as from 1 July 2016.
Going forward, the PID income will be called ‘Innovation Income’, which reflects the broader scope of the qualifying income. The Innovation Income Deduction (‘IID’) can apply to income derived from the following intellectual property:
- patents and supplementary protection certificates of which the company has the full ownership, co-ownership, usufruct or licence or exclusive rights;
- breeders’ rights of which the company has the full ownership, co-ownership, usufruct or licence or exclusive rights, requested or acquired as from 1 July 2016;
- intellectual property of copyrighted software as from 1 July 2016.
Under the PID regime, the benefit was only provided as from the year the patent was actually granted. Going forward, the benefit would also become available as from the date the patent is requested (and provided that the patent is actually granted afterwards).
All marketing related intangibles such as trademarks would still not qualify for tax benefits under the IID regime.
Without making any restriction to SME’s, the following income will be considered as derived from the above qualifying income, in so far as the remuneration is included in the Belgian taxable result of the Belgian company or branch concerned:
- licence fees;
- IP income embedded in the sales price of own manufactured products, for which a third party would be willing to pay a licence (so-called ‘embedded’ royalties);
- IP income derived from process innovation;
- damages on the basis of a court decision, an amicable settlement or an insurance settlement.
Furthermore, also capital gains on qualifying innovation intangibles might qualify going forward.
Modified nexus approach
In consideration of avoiding that the Belgian IID regime would appear to constitute a harmful tax practice, the modified nexus approach has to be taken into account. The nexus approach intends to ensure that, in order for a significant proportion of Innovation Income to qualify for benefits, a significant proportion of the actual R&D activities must have been undertaken by the taxpayer itself.
As a matter of business practice, unlimited outsourcing to related parties should not provide many opportunities for taxpayers to receive benefits without themselves engaging in substantial activities.
Given the above, the IID will be determined by multiplying the Innovation Income with the below ratio. The fraction represents the ratio between the own R&D activities and the outsourced R&D activities (towards related parties). As such, the taxable result of a Belgian company or branch could be reduced by 90% of the total net innovation income after applying this fraction.
Important to note is that the ratio going forward should be calculated on a net basis implying that (contrary to the PID regime), current year deducted overall expenditure should be deducted from the current year qualifying Innovation Income.
It is thereby also provided that excess deduction that cannot be used due to insufficient taxable basis, can be carried forward to be compensated with future taxable profits (contrary to the PID regime).
The qualifying expenditure is the expenditure incurred by the company itself or the compensation for the expenses of non-related companies of outsourced R&D activities.
Qualifying expenditure must be directly connected to the IP asset. The expenditure does not include interest payments, costs related to immovable assets or any costs that could not be directly linked to a specific IP asset. If R&D activities are outsourced to a non-related company via a related company, the related costs will qualify as qualifying expenditure on the one condition that the compensation is charged without mark-up (i.e. as a disbursement). Based on the OECD report on Action Point 5, acquisition costs related to qualifying intangible property should not be taken into account as a qualifying expenditure, but should be included in the overall expenditure.
Uplift of the qualifying expenditure
The qualifying expenditure may be uplifted with 30%, with a maximum of the overall expenditure. This means that the uplift may increase the qualifying expenditure but only to the extent that the taxpayer has non-qualifying expenditure. The purpose of this uplift is to ensure that the nexus approach does not penalise taxpayers excessively for acquiring IP or outsourcing R&D activities to related parties.
In exceptional circumstances, it can occur that although an uplift of 30% is added, the nexus ratio does not represent reality. As such, provided that the ratio as set out above (excluding the uplift) equals or exceeds 25%, a higher ratio may be applied. In that case, the taxpayer must prove that the outcome of the ratio between self-performed activities for R&D and the total R&D activities does not reflect reality.
The overall expenditure in the denominator of the ratio includes the qualifying expenditure increased with the acquisition costs related to qualifying intangible property and the expenditure for related-party outsourcing.
Tracking and tracing
Since the nexus approach depends on there being a nexus between expenditure and income, going forward, taxpayers will have to carefully track and trace the expenditure, IP assets and income. In this respect it is foreseen that supporting documentation will have to be kept at the disposal of the tax authorities (such as the gross amount of the income, overview of expenditure, the link between the costs and income). In practice, it can be predicted that this will not that easy to manage and may imply cumbersome administrative burden for Belgian taxpayers.
Grandfathering and entering into force
The new regime is envisaged to enter into force as from assessment year 2016, i.e. to be applicable for the financial years ending on or after 1 July 2016. No new entrants can benefit from the existing PID regime since 1 July 2016. Taxpayers benefitting from the existing PID regime will be able to choose for the existing PID regime or the new IID regime and will be able to receive these benefits for five years (grandfathering until 30 June 2021). The choice for the new IID regime is irrevocable.