Back in 2007 the patent income deduction (PID) was introduced in Belgium, a fiscal benefit intended to stimulate innovation in Belgian enterprises. This system allowed a deduction of 80% of the gross income resulting out of a patent, thereby reducing the effective tax rate to a maximum of 6,8%. This could be cumulated with other benefits such as notional interest, allowing to even further reduce fiscal pressure.
Lately, these kinds of fiscal benefits are increasingly being criticised because certain enterprises got a bit too fanatic with their fiscal optimatisation, to the point where this is no longer acceptable from the viewpoint of general interest. Therefore the PID was abolished on July 1, 2016 and thereby Belgium conforms to the BEPS (Base Erosion and Profit Shifting) recommendation of the OECD that caused other similar regimes to be withdrawn such as the IP Box applied in Luxembourg.
In order to fill the gap a new measure has been taken in the form of innovation income deduction (IID), also allowing the deduction of certain innovation related income from the taxable basis and conforming with BEPS recommendations. Those who benefitted from PID will therefore not be left empty handed, but will be confronted with a different system.
To start with the good news, the scope of the IID will be broader than that of the PID. Whereas the latter was limited to income resulting from patents and SPC’s, the former will also allow a deduction applied to income resulting from plant variety rights and copyrighted software. Further the scope of what is considered as “income” will also be broader and encompass for instance capital gains.
The basis on which the deduction will have to be applied will also be different. Rather than deducting 80% from the gross income, the IID allows 95% net income deduction. As a result the overall expenditure taken as an expense and borne in the taxable period will have to be deducted first, including historical R&D costs. Further a so-called “modified nexus fraction” needs to be applied to this net income.
The modified nexus fraction is determined as follows. First the sum needs to be calculated of the R&D expenditure made by the taxpayer, the expenses for R&D outsourced to third parties and “pass-through” costs paid to third parties by a related company. This then is divided by the same amount to which expenses made by the taxpayer for acquiring the qualifying IP right as well as expenses made by the taxpayer in the context of outsourcing to a related party are added. The resulting fraction may then be multiplied with 1,3.
These changes will in some cases be more beneficial and allow a higher amount to be deducted than was allowed under PID, however companies with high investments will suffer since the basis on which the deduction is applied will be smaller and the modified nexus fraction will also be less favorable.
Finally, by means of transition a grandfathering regime will be applied allowing taxpayers to choose to continue to use the PID until June 30, 2021 at the latest or to immediately apply the new IID. Such choice will be irrevocable and it is not possible to switch to the other system.
It is expected that the IID will be approved by the parliament early next year.