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What if your software benefited from a tax break?

The Innovation Income Deduction (IID) has opened the door to other intellectual property rights. This is a boon for copyrighted computer programs. You just need to determine – and prove – that your software is eligible for the IID… Here’s how.

It’s no secret that the degree of research and development (R&D) is a real driver of economic performance. That’s why, more than ever, companies need to focus on innovation. And keep on innovating… But this engine needs fuel – investment. This is a financial effort that Belgium has been striving to encourage, including via a rather attractive fiscal framework. At the forefront of these tax incentives is the Innovation Income Deduction (known as the IID). This is an essential mechanism for companies of all sizes and in all sectors, as long as it is used and its benefits are optimised to the maximum.

The niche that favours software
The IID, which is gradually replacing the Patent Income Deduction (PID), provides an 85 percent tax break on profits from intellectual property rights (IPRs). This means, under certain optimal conditions, an effective tax rate of up to 5.1%. Its appeal is all the greater since the scope of application is not limited to patents: other IPRs are now eligible – specifically, computer programs protected by copyright. The objective is obvious: to promote the development of software with high added value in Belgium. In reality, many managers have understood what they stand to gain, since almost half of the rulings (advance tax rulings) linked to the IID relate to software revenue. In spite of the tax authorities’ figures, the potential is still untapped in many companies…

Is my software eligible for the IID?
This is the first question to ask… How many companies are unaware that they have innovative software that could benefit from the IID? The software used within your company is a source of intellectual property and profit, and could therefore be eligible for the IID. It needs to meet two cumulative conditions, and you also need to be able to justify it. Remember also that you must be the owner (co-owner, beneficiary or holder of a licence or of rights of use) of the IPR, whether the software was developed internally or acquired externally. But before discussing these two key conditions in detail, let’s look at the notion of a “computer program” as defined in the regulations.

New software, but not just that
Let’s take the case of a start-up that develops and markets a profitable software package. The start-up can use the IID to reduce its tax burden. But the scheme is not limited to new designs. Imagine, for example, that your software has to be updated every two or three years to keep up with the latest technology or to meet growing cyber security requirements. Or perhaps you want to develop a mobile version of your application or add a key feature for your customers. These are IT developments that are also eligible for the IID. In other words, adopting a more powerful version, enhancing, updating or modifying an existing system – as long as it is not a routine or support operation – is also eligible. Provided, of course, that your project meets the other regulatory requirements.

Two major conditions:

  1. No revenue generated before 1 July 2016. The question of timing is crucial. But in practice, it is not always easy to find your way around… and sometimes you have to be “creative”. If your computer program was developed before (or straddles) this date, how do you know what revenue to declare? You could also look at updates and estimate that the software needs a major overhaul every three years. The revenues created from this evolution (post mid-2016) could count towards IID. In any case, the authorities will ask you to carefully justify your schedule and methodology, so don’t go in blindly.
  2. Protected by copyright. What does this mean? Your software is original, innovative. In other words, the software – certain stages of its development, important updates, a derivative of the main version, etc. – must be the result of an R&D project or programme. Sounds straightforward enough, but do you have the arguments to back up your claim…

Prove the “R&D” nature of your software
If you have applied for a subsidy for the withholding tax on professional income, you will have had to request a binding opinion from BELSPO (Federal Public Service for Science Policy Programming). The good news is that this document can be used for the IID. If you don’t have this, you will need to find another way to shed light on the matter. Try the OECD’s Frascati Manual. For more than half a century, this manual has provided the basis for a common language for dealing with the subject of R&D and has become a key reference document. Moreover, its definition of R&D has largely inspired most national regulations. Without going into detail, refer to the five criteria that define the scope of R&D to find out if your software will be eligible for IID.

The five criteria of R&D:

  1. Innovation: The activity must aim to generate new discoveries (results, methods, techniques, models, etc.).
  2. Creativity: It must be based on original, non-evident notions and hypotheses.
  3. Uncertainty: The final result must be uncertain in character.
  4. Systematic: The activity must also be planned and budgeted.
  5. Transferable and/or reproducible: Finally, it must lead to results that can be reproduced or transferred.

Is BELSPO’s opinion obligatory?
In theory, you are not obliged to seek a binding opinion from BELSPO. Just as, unlike other intellectual property rights, software does not have to be registered. In practice, however, things are a little different. This is because, if you wish to obtain a ruling from the Belgian Ruling Commission (Service des décisions anticipées; SDA), a department of FPS Finance (Federal Public Service of Belgium) concerning your application to the IID, you must de facto produce a binding opinion from BELSPO. The ruling request is your safety net. In other words, these two procedures, one scientific and the other fiscal, are inseparable and essential to ensure certainty for you and to protect you from a possible backlash from the tax authorities.

The end of the journey? Not quite
Once these conditions have been met, you are not yet at the end of the road. Indeed, calculating the IID remains one of the stumbling blocks in the mechanism, given its fuzzy-edged interpretation and its technicality. You will need, among other things, to identify the innovation revenue and R&D expenditure related to your software. And let’s not forget the calculation of the nexus ratio. Finally, all of this must be duly traced and justified in order to submit your ruling request, as well as to avoid problems down the line. You must therefore make a range of supporting documents available to the administration. As with other niche taxes, the principle of the IID is not rocket science, but applying it calls for specialised expertise, requiring technical, financial and legal/tax knowledge. And that’s a road best travelled in good company!

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