Belgian taxpayers can beneﬁt from two types of Patent Box regimes:
Patent Income Deduction
The Law of April 27, 20071 introduced the Belgian PID. This regime covers patent income from patents commercialized on or after January 1, 2007. The regime applies to Belgian companies, as well as Belgian permanent establishments (PEs) of foreign companies that invest in research and development (R&D) of patents and obtain ownership of patents or improve licensed IP.
The PID regime grants a deduction of 80% of the Belgian taxpayer’s patent income from the taxpayer’s Belgian tax base. The PID regime applies not only to income derived from patents licensed to a Belgian or foreign company (royalties) but also the resulting income from patents used by the Belgian taxpayer in producing patented products (so-called ‘‘embedded royalties’’).
The PID regime applies to patents and extended patent certiﬁcates. Other rights such as trademarks, trade names, and designs, do not qualify for the PID. The PID regime applies to income generated from:
Innovation Income Deduction
A. Evolution from PID to IID
Beginning on July 1, 2016, the existing PID regime was replaced to be in line with the OECD BEPS Action Plan, in particular, the dispositions under Action 5 relating to the modiﬁcation of the Nexus approach to Intellectual Property (IP) special regimes (the so-called ‘‘IP boxes’’). Subject to certain conditions, the existing regime is grandfathered for ﬁve years.
Taxpayers can still beneﬁt from the PID regime for any related patent income earned until June 30, 2021. The scope of this regime includes:
According to the Modiﬁed Nexus Approach, there should be sufﬁcient substance and an essential link between the R&D expenses, the qualifying Intellectual Property Rights (IPR), and the related income for a taxpayer to beneﬁt from a beneﬁcial income tax regime.
To meet these requirements, the Belgian government has created a new tax regime called the Innovation Income Deduction, which replaces the PID.
In this context, on February 2, 2017, the Belgian legislature published the new IID Law as the successor to the PID Law of August 3, 2016.
The new IID Law outlines the following dispositions:
The differences between the previous PID regime and the new IID regime are summarized in the following diagram:
B. Scope of the IID 3
The IID applies to income derived from:
Furthermore, the IID applies to ﬁxed (e.g., annual or monthly fee, irrespective of volumes produced) or variable (e.g., percentage of sales) patent income, as well as to other patent income (e.g., milestone payments).
The deduction no longer applies to gross income but rather qualifying net income, which is determined after a deduction of R&D costs.
Only R&D costs directly linked to the qualifying IP should be deducted. Interest payments and costs related to land and buildings that do not represent real R&D activities should not be deducted.
Qualifying Income 4
The IID applies to income derived from:
The types of income streams that may qualify for the application of the IID include the following:
A speciﬁc requirement of the Modiﬁed Nexus Approach is that the beneﬁcial tax regime is applied to the net IPR income and is subject to a speciﬁc formula to weigh the taxpayer’s own contribution to the creation of the IPR.
The following formula has been introduced to determine the amount of income that can beneﬁt from the preferential regime: [qualifying R&D costs/total R&D costs] x net income from IPR.
The costs of outsourcing R&D work to related parties or acquiring IPR are excluded from qualifying costs. However, the costs for outsourcing R&D to unrelated parties or costs occur-ring within the framework of a cost contribution arrangement are considered qualifying costs. In addition, a lift-up of 30% of the total qualifying expenses for R&D is foreseen (without the fraction exceeding 1).
As mentioned above, unused IID can be carried forward to future taxable periods, without limitation in time. The taxpayer can also claim the beneﬁts of the regime while a patent is still pending. Under the old PID regime, it was not possible to carry forward unused PID.
Tracking and Tracing 5
The IID requires certain documentation in the context of tracking and tracing the qualifying IP, income, and costs. This means that the taxpayer needs to document and prove the qualifying and global expenses for each IP. Upon certain conditions, the taxpayer can report and document a group or type of products or services.
In order to meet these special documentation requirements, a speciﬁc form must be added to the corporate tax return by both small- and medium-sized enterprises (SMEs), as well as large companies.
2. Assume that a Country A parent company owns an IP affiliate eligible for the patent box regime in Country B. What Country A issues arise from this situation (e.g., CFC legislation, taxation of dividends from the patent box, etc.)
In the event Belgium can be regarded as the parent company, i.e. country A, the normal rules on dividend income will apply, independently of whether a subsidiary (situated in country B) would apply a patent box or not.
However, Belgium, as an EU member state, is subject to the Anti-Tax Avoidance Directive (ATAD), which must be implemented into its domestic law by December 31, 2018. The ATAD includes an interest limitation provision to discourage artiﬁcial debt arrangements designed to lower the taxable base, as well as CFC legislation in case of artiﬁcial constructions.
3. Assume that a parent company owns an operating subsidiary in Country A and an IP affiliate eligible for the patent box regime in Country B. What are the Country A issues if royalties (or other payments) are paid from Country A to the IP affiliate in Country B? What is the impact if the IP affiliate does not meet the OECD modified nexus approach?
Royalty payments will need to be made according to the arm’s length principle. Intercompany transactions are under great scrutiny pursuant to new BEPS regulations.
Current Belgian regulations also oblige taxpayers exceeding certain thresholds to complete and submit transfer pricing forms. These forms disclose detailed transactional data; there-fore, transfer pricing compliance is highly recommended.
We also refer to the ATAD, as described above, and the future application of CFC legislation in case of artiﬁcial structures.
Apart from the ATAD implementation, Belgium did not implement speciﬁc legislation through which the deductibility of royalty payments would be linked to the IP box regime at the recipient level.
4. What other R&D tax incentives or benefits does your country offer to attract investment in R&D, e.g., credits, super-deductions, grants, tax holidays, etc.?
Pursuant to current Belgian Tax Law, the additional R&D incentives include the following:
Wage Withholding Tax Exemption
Companies that employ researchers with a scientiﬁc master or doctoral degree beneﬁt from a partial exemption from payment of withholding tax on their wages. Only 20% of the with-holding tax due on the wages of these researchers need to be transferred to the tax authorities, while 100% of the withholding tax due in principle can still be credited.
As a result of the Belgian corporate income tax reform, this withholding tax payment exemption now also applies to scientiﬁc bachelor degrees. As of January 1, 2018, employers can exempt payment of up to 40% of the wage withholding tax for their bachelors engaged in R&D programs. As of January 1, 2020, the exemption will further increase to 80%. The total ex-emption for bachelors is capped at 25% of the total exemption applied for masters and doctors.
Increased Investment Deduction or Tax Credit for Re-search and Development
A percentage of the acquisition or investment value of certain assets that have been acquired or established during the taxable period and that relate to R&D is tax deductible.
This deduction comes in addition to the normal tax deductible depreciation of these assets, leading to an overall tax deduction that is higher than the assets’ value.
Qualifying ﬁxed assets:
Applicable Rules and Rates
The increased investment deduction can be applied as a one-off deduction. In that case, the deduction equals 13.5% of the acquisition or investment value (assessment year 2019).
The deduction can also be spread over the depreciation period of the ﬁxed asset (this option is not available for patents). In that case, the investment deduction each year equals 20.5% of the depreciation amount (for ﬁxed assets acquired or established during assessment year 2019).
Carry-Forward to Later Assessment Years
When the deduction cannot be (fully) set off against the profits of the taxable period, the (proportion of the) investment deduction that has not been used can be carried forward without any time limit and can be set off against the proﬁts of the sub-sequent taxable periods.
Option for a Refundable Tax Credit
Companies have the option to apply for a tax credit instead of the increased investment deduction. This tax credit allows the taxpayer to show how the tax advantage directly reduces the operational R&D costs.
In case there is insufﬁcient tax against which to set off the tax credit, the credit can be carried forward to the following four assessment years. At the end of these four assessment years, the balance of the unused tax credit is cash refundable.
Tax Exemption of Regional Subsidies
Premiums and capital or interest subsidies on tangible and intangible assets granted by regional institutions within the framework of support to R&D are fully exempt from corporate tax.
Belgium has an efﬁcient, transparent, business-oriented, and advanced ruling practice, which provides investors the necessary legal certainty on how the tax law will be applied to their speciﬁc situations or to speciﬁc transactions. Furthermore, when deploying IP-intensive R&D activities in Belgium, the appropriate business model and related tax and transfer pricing issues may be discussed in detail with the Belgian ruling authorities up front.
Dirk Van Stappen, Yves de Groote, and Andrea Ramirez KPMG Belgium
Original source: Bloomberg Tax