Belgium | Innovation Income Deduction: tax incentives for life sciences, tech, media and comms and financial services

Since 1 July 2016, the Belgian Innovation Income Deduction (IID) allows Belgian companies and Belgian permanent establishments of foreign companies, which are the owners licensees or rights owners of the IP rights/assets, to deduct 85% of the net income deriving from IP innovations for tax purposes.

The tax incentive can be carried forward for an unlimited period of time where there are insufficient taxable profits. The new tax incentive can also be maintained in the event of restructuring (merger or demerger). The IID can be claimed whilst a decision about whether or not the intellectual property right will be granted is pending.

The “DNA” of the new Innovation Income Deduction can be summarised as follows:

Tax regime compliant with international standards

The IID has replaced the former Belgian Patent Income Deduction (PID) tax regime, which was abolished on 1 July 2016. An optional transitional regime accompanied the abolition of the Belgian PID. Enterprises have the right to apply, or to continue to apply, the “old” PID until 30 June 2021 with regard to income derived from: (i) patents that were granted before 1 July 2016 and to which the “old” patent income deduction has already been applied; (ii) patents that were applied for before 1 July 2016 but were only granted after that date; or (iii) patents that were acquired from another party before 1 July 2016.

The main advantage of the new IID – compared to the former PID – is that it is consistent with the standards issued by the European Commission and by the OECD Base Erosion and Profit Shifting (BEPS) Project. Hence, the tax incentive should not be re-characterized as State Aid by the EU entities, nor be challenged by the OECD.

Calculation of the deductible income

The rate

The rate of deduction has been increased to 85% (the deduction rate of the former Patent income deduction amounted 80%). Hence, companies may benefit form an effective tax rate of 5.1% on the qualifying IP income.

“Net” income

In order to comply with Action 5 of the BEPS measures and the OECD and European standards, the deduction applies to the net amount of qualifying IP income (gross revenue reduced by various expenses defined by the law). The income is not only made up of  license remuneration, but also of any IP right remuneration embedded in a sale price, indemnities linked to a breach of IP rights, and the sale price of a IP rights (subject to conditions and reinvestment).

Nexus approach

In line with the international standards, the deduction will be applicable only if sufficient economic substance exists in Belgium. The assessment of sufficient economic substance will be made through the R&D expenses claimed in Belgium by the company (i.e. a modified nexus approach). Accordingly, the net amount of qualifying IP income has to be reduced if and to the extent that R&D work is outsourced to related entities or that qualifying rights are acquired.

The net amount of qualifying IP income is limited by a fraction of which the numerator will be the company’s own R&D expenses – including expenses outsourced to unrelated parties – with an uplift of 30% (capped at the amount of the global R&D expenses), and the denominator will be the global amount of R&D expenses (including the expenses outsourced to related parties and the acquisition price of the IP rights).

In other words, the IID will be calculated as such:

“IID” = 85 % x net IP income x [(own R&D expenses x 130%) / global R&D expenses]

This fraction has to be applied – if possible – for each IP asset separately. Furthermore, if it appears that the deduction is too low compared with the added value of the R&D activities, the company can seek a tax ruling (subject to exchange of information) from the Belgian ruling committee for a higher fraction to be used.

Qualifying IP assets

The scope of the IID has been substantially broadened compared to the former PID. The deduction is from now on applicable to:

• patents and supplementary protection certificates;
• computer programs, including derivative works of existing software’s (provided that certain R&D conditions are met);
• plant breeders’ rights;
• orphan drugs; and
• some phytopharmaceutical products and medicinal products for human or veterinary use, and for which a data or market exclusivity is granted.

Opportunities for the different sectors

The life sciences sector has developed significant R&D activities in Belgium with the benefit of the previous PID, and can continue to develop this expertise with the IID. The scope of the qualifying IP rights is extensive and should meet most of the value creation by way of R&D activities (creation of patentable invention, on discovering new plant variety rights and new orphan drugs).

Because the list of qualifying IP is longer than the previous regime, other sectors could benefit from this deduction. The tech, media and comms and financial services sectors should consider whether they have qualifying IT assets. In particular, computer programs fall into the scope of this new tax incentive provided certain conditions are met. Income deriving from such computer software created in the context of an R&D project or program (i.e. as part of  fundamental research, industrial research or experimental development) could potentially benefit from the IID (e.g. the development of risk models for credit policy; R&D related to electronic banking and insurance, internet related services and e-commerce; experimental development of new software for home banking; development of risk models for credit policy; mathematical research relating to financial risk analysis, and development of software for investigating consumer behaviour). Companies should seek binding advice from the Federal Public Planning Service Science Policy in order to know if the software qualifies for the deduction or not.

Businesses in the tech, media and comms and financial services sectors should consider whether they could benefit from the IID regime in Belgium for all of their new inventions and computer software.

How we can help

Osborne Clarke’s Tax and IP teams can assist you by performing a detailed analysis in order to determine if your company can benefit from the IID regime and by obtaining binding advice from the Belgian authorities (on computer programs and/or tax ruling). If you would like to discuss this, please contact one the experts listed below.