The tax audits with respect to the application of the partial withholding tax exemption for research and development with respect to income year 2021 are ongoing. With recent case law on the subject, two critical elements should be considered during these types of audit.
Upfront notification with Belspo
Recent case law of the Belgian Court of Cassation – upfront notification of the R&D activities
If the conditions as stated in the law are met, a company can exempt up to 80% of the withholding tax of the applicable employees. One of these crucial conditions is that the company has registered their R&D-program/project with Belspo upfront. In this notification the expected start date and estimated end date of the project/program should be included under penalty of nullity of the entire exemption.
The Court of Cassation confirms the judgement of the Court of Appeal of Ghent (May 5th 2020)
With its judgement of May 5th 2020, the Court of Appeal of Ghent indicates that article 275/3 ITC is clear as it states that the expected start date should be included in the notification to Belspo. Therefore, the exemption can only be applied correctly if the application is done before the start of the program/project and prior to the period to which the eligible remuneration relates. In other words, the exemption cannot be applied in case the application is done when the R&D-program/project has already started. This strict interpretation is now confirmed with the judgement of the Court of Cassation of January 6th, 2023.
Interpretation of the tax authorities
With respect to potential retroactive application of the partial exemption, the tax authorities have shared the following:
The partial wage withholding tax exemption can only be applied as from the month in which the program or project was notified to Belspo. This application cannot work retroactively to a moment prior to said notification.
Specifically, for a project or program, that has a total duration of 24 months, that was only notified during the 20th month, the R&D withholding tax exemption may only be applied for the remaining duration of the project or program.
The tax authorities now clarify their interpretation of the case law. Applicants are allowed to make use of the application method as generally accepted before the judgement of the Court. This, however, is possible only until August 1st, 2023.
In practice, we experience that this stricter interpretation was already followed by some tax inspectors before the confirmation by the Court of Cassation. Moreover, the clarification does not mention the yearly notification, which leaves many companies in the dark on the concrete application requirements deemed relevant by the fiscal authorities. As such, one can conclude that this transition period does not bring any solace, and only contributes to more confusion at the time of controls where, given the current trend, increasingly aggressive positions are taken.
What are the consequences of the confirmation of this case law?
As the taxpayer carries the burden of proof on meeting the conditions with respect to the applied wage withholding tax exemption, the taxpayer should be able to prove that the Belspo application was done in due time i.c. before the start of the program/project. In case the taxpayer cannot meet this condition, the tax inspector can reject the applied exemption fully as the legal conditions are considered not to be met.
As a result, applicants should take the following dates into consideration in order to prove that the Belspo application was done in time with respect to the implementation of the obligation to apply the R&D programs/projects with Belspo as of 2014:
In case the program/project was already running before 2014, the Belspo application needed to be done at January 1st 2015 at the latest;
In case the program/project started after 2014, the Belspo application needed to be done before the start.
In case the taxpayer already had a tax audit regarding this exemption in previous years, the abovementioned new obligation could be left aside as the taxpayer should be able to invoke the principle of legal certainty.
What to expect in case of a tax audit?
Our expectations are that the tax authorities will take this new case law into account when assessing the legal conditions regarding the application of this exemption. This new case law can potentially lead to discussions and will likely be invoked in case the tax inspector rejects the applied exemption.
With the legislative changes of the 28th of March 2022, the legislator has foreseen in the application of a tax increase between 10% and 200% in case the declarations with respect to the wage withholding tax exemption contain incorrect information.
In case the tax inspector means that the exemption was not applied correctly (e.g. when too much withholding tax exemption is claimed because one of the employees, on whose behalf the exemption is applied, is not in the possession of a qualifying degree), the abovementioned increase will be applicable as the declaration with respect to the withholding tax exemption was not done correctly as too much exemption is applied. The results of previous audits with respect to the applied withholding tax exemptions will be taken into account in order to determine the tax increase.
How can we help?
For more insights on partial withholding tax exemptions, assistance with the application thereof or assistance in case of a tax audit, reach out to your regular PwC contact or Bart Van den Bussche.