Belgium continues to be a country that welcomes innovative companies, thanks to a very attractive fiscal framework, and here is the latest boost… The IID, a tax incentive that is not limited to patents (unlike the PID), is available for other intellectual property rights (IPRs). The wider scope of application is a boon for companies.
Belgium has a clear understanding of the key role of innovation. With its central position in Europe, highly qualified human resources, and the presence of high-performance clusters, Belgium is a benchmark in this field. It is therefore no coincidence that our country continues to demonstrate fiscal generosity to stimulate research and development (R&D). So much so that the OECD has had a close look at the very attractive Patent Income Deduction (PID). The tax niche was considered a little too “generous” by the international Organisation for Economic Co-operation and Development. Belgium was therefore encouraged to reconsider its approach. The innovation income deduction, called the IID, was about to see the light of day…
The end of cohabitation
The PID has gradually been replaced by the IID since 1 July 2016, although the transitional period does not end until 1 July 2021. It should be remembered that the PID – in force since 2007 – enabled the tax burden on income from patents and supplementary protection certificates to be reduced. It was a way to stimulate R&D activity in Belgium, as well as to attract foreign companies, thanks to a deduction of 80% of gross income. This measure has, among other things, helped to attract giants in the global pharmaceutical industry to our part of the world. Even though the PID and the IID still coexist, the focus is now on the successor. And for good reason: despite their differences, this new incentive is of no less interest. Quite the contrary!
A revised formula
The first major change is that the tax deduction increases to 85%, but on net R&D income, unlike the PID, which was based on gross amounts. From now on, you have to deduct R&D expenditure from your turnover to determine your tax base. It should be noted that the legislator has simultaneously broadened the sources of income eligible for the IID: it can be a licence fee (or included in the sale price), compensation received following a violation of the law, or a sum obtained after the law has been disposed of. The second major novelty of the IID is that the scope is no longer limited to patents and now extends to other intellectual property rights (IPRs). Remember that these rights serve to protect “creations that play an economic role in production and distribution processes”. But which ones?
No longer reserved for just patents
The IPRs to which the Innovation Income Deduction (IID) applies are as follows:
- Patents or supplementary protection certificates: those already taken into account under the old system (PID);
- Plant variety rights (applied for or obtained as of 1 July 2016): this concerns the marketing of a new plant species, given the significant investment required for its cultivation;
- Orphan drugs (applied for or obtained as of 1 July 2016): this concerns drugs related to “serious and rare” diseases, i.e. those affecting less than one person in 2000 and for which there is no treatment as yet. Note that the IID is only applicable for the 10 years following registration in the European Register of Orphan Medicinal Products.
- Data or commercial exclusivity granted by public authorities (from 1 July 2016) for plant protection products, human and veterinary drugs and orphan drugs;
- Copyrighted computer programs, i.e. the development of new software, as well as a derivative creation or adaptation of existing software (no routine). In all cases, it must be the result of an R&D project or programme (according to the established definition).
Exclusions and conditions
This is a great step forward offered by the IID, since you enjoy greater latitude for taking advantage of the tax benefit. But beware, not everything is allowed, nothing is automatic and conditions apply, for example…
- Which companies are targeted? All companies under Belgian law, but not just those… Domestic entities of foreign companies can also make use of it, as long as the IPR is assigned to the organisation in question. Revenue from an organisation outside of Belgium is, therefore, excluded.
- An IPR created internally or acquired externally? In order to benefit from the IID, the company must be a full owner, co-owner, beneficiary, or licensee (exclusive or not) of the right. This should have been developed internally, subcontracted (to an independent company or part of the same group) or purchased. However, depending on the case, the benefits of the IID will not be the same (depending on the nexus ratio).
- Is a research centre essential? With the IID, the capital element is the “substance”, i.e. the link between the R&D activity and the resulting revenues. Hence there is no requirement for a research centre (as with the PID). Instead there is the nexus ratio, an (almost) magic coefficient, founded on the basis of your expenditure, which affects your IID benefit either positively or negatively. For example, if you have financed the R&D efforts yourself, your profits will be higher than those of a company that simply acquires innovative software.
- Do you need to register? Whereas previously the granting of a patent was required to benefit from the PID, from now on a simple request for recognition of the intellectual property is sufficient. For software, this formality is not required (in theory).
- Outside of the scope? Finally, note that the IID is not applicable for any other IPRs, for example, those related to marketing (specifically, revenue derived from a trade name, logo, design, model or trademark).
Not sure about something? Don’t take any risks
At this stage, given the significant tax gains, you are certainly going to be tempted to try the IID route. However, you will still have to answer a range of fundamental questions before lifting the prize…
- Does your in-house software fall within the scope of application? ;
- Can you clearly identify the eligible income and expenditure? Does your accounting, legal and technical documentation meet the expectations of the tax authorities? ;
- Is your nexus ratio correctly calculated? ;
- Do you need to request a binding opinion from the technical authority (BELSPO)? ;
- Have you optimised the gains from the IID? ;
- How do you apply to the Belgian Ruling Commission (Service des Décisions Anticipées; SDA) for a ruling?
These are all unknowns that need to be thought of in advance for an optimal – and risk-free – result further downstream. The key to success when dealing with the IID is specialised support, from A to Z, that shoulders the responsibility: “No cure, no pay!”