The Innovation Income Deduction (IID) has been a real success and a tax incentive not to be missed. But you still need to watch your back – in terms of calculations and methodology – to avoid a backlash from the taxman. How? By obtaining a commitment (a ruling or advance ruling) from the Belgian Ruling Commission (Service des décisions anticipées; SDA), a department of FPS Finance (Federal Public Service of Belgium). Follow our guide…
IID rulings are a flourishing business (that is on a roll)! Indeed, the number of prefilings (preliminary applications) boomed in 2019, from 129 (in 2018) to 202 requests, a fact confirmed by the authorities in the last annual report of the SDA. The trend is further reflected in the number decisions delivered, up from 43 in 2017 to 107 in 2019. These figures demonstrate the growing interest in the innovation income deduction (IID) – and with good reason, since this niche allows companies to exclude 85% of their net income from innovation. This equates to an effective tax rate of 5.1% on your internally supported R&D efforts (one of the most favourable scenarios). While we certainly should not miss out on this, it is best to take a few necessary precautions.
A dampening uncertainty
Belgium is one of the most generous countries in terms of R&D-related taxation. But while the mechanisms are simple to understand, they are sometimes difficult to apply. The IID is no exception to the rule, which is why, despite rising figures, the system is still under-used by companies. Some believe (wrongly) that it does not concern them, while others take the plunge, but without exploiting its full potential or by taking ill-considered risks. The problem lies with the administrative burden and complexity of implementation, as well as with fuzzy interpretation of the rules and conditions. It is no coincidence that nearly half of all R&D-related tax audits result in an adjustment, and this legal and tax uncertainty dampens the enthusiasm of managers, even though they have plenty to gain by adopting the IID. How can we free ourselves from this risk?
Why a ruling?
First of all, let’s recall what a ruling is: it is an advance decision by the tax authorities, which functions as a legal security offered to taxpayers. FPS Finance thus undertakes to accept and respect a situation, an operation or a methodology that will have fiscal implications in the future. Once validated, the administrative decision sets the applicable conditions in stone. The IID falls fully within this framework, since the process is not automatic, it is highly technical and there are multiple legal conditions. Indeed, you have to answer a series of questions in advance and make choices without a safety net: which intellectual property rights (IPRs) does the IID apply to? Is your software eligible? Which income and expenditure do you take into account when applying the 85% deduction? Is your nexus ratio calculated correctly? Is your application sufficiently documented? These are all doubts that it is in your best interest to dispel – with a ruling.
Your safety net
A request for a ruling is therefore more than advisable – it is practically essential. A positive advance ruling is synonymous with legal and tax certainty for a period of 5 years for patents and 3 years for computer programs. Agreements made with the tax authorities are renewable. But before reaching this point, the SDA procedure still has to be carried out according to a very precise format and schedule. The following two pillars are fundamental:
- A solid report: All the elements of your application are subject to the interpretation of the tax authorities: the “innovative” nature of your software; the determination of qualifying income; calculation of the nexus ratio, etc. And since the IID is a deduction, the burden of proof is on you. You must be prepared to justify your choices, your methodology and your calculations before the administration. Moreover, the rules of this duty of documentation and traceability were specified in a Royal Decree at the end of 2019. Among other things, you must demonstrate:
• the actual value of the intellectual property right, where this is acquired from an affiliated company;
• the amount of revenue from innovation to be taken into consideration, as well as the method chosen to identify the gross revenue;
• the absence of revenue generated before 1 July 2016;
• the amount of direct and indirect expenditure to be deducted from the revenue from innovation;
• calculation of the nexus ratio, making an explicit distinction between the different categories of R&D expenditure.
- A meticulous schedule: Nothing must be left to chance in this respect in order to be able to meet the requirements of the authorities. Here is how the process before the SDA takes place in specific terms.
In practice – step by step
- BELSPO’s opinion: R&D or not R&D?
Before starting your ruling request, it is in your best interest to validate the innovative element of your computer program. In other words, make sure it is eligible for the IID by contacting BELSPO (Federal Public Service for Science Policy Programming). If not, your whole approach will collapse like a house of cards… It is therefore strongly advised to request a binding opinion from the scientific authority, via the electronic form available on the BELSPO website, in order to certify the R&D nature of your software (its development or a possible update).
- The ruling request: a guarantee of security
The next step therefore takes place before the Belgian Ruling Commission (Service des décisions anticipées; SDA), a department of FPS Finance. The aim is clear: to defend your methodology in applying the IID, specifically determination of the gross income from innovation and calculation of the nexus ratio.
- The first thing to do Submit (by email or post) a request for prefiling to the SDA by the end of January at the latest (for fiscal years ending on 31 December). This is an initial submission, which is subsequently adapted according to the questions from the tax authorities and your additions. If your fiscal year does not coincide with the calendar year, start the procedure at least eight months before the deadline for the tax return.
- Then comes the filing Once the tax authorities agree with the details of your approach (explained in the prefiling), the next thing is the official request (called filing), to be submitted before the end of June so that the ruling can be issued before the end of September. In fact, you generally have until the beginning of October to file your tax return.
- The ruling is set in stone As soon as your file has been validated by the tax authorities, the entire process is definitively protected. No subsequent audit can call into question the methodology developed in consultation with the SDA. Your tax benefits linked to the IID are therefore assured!
Don’t tackle the SDA on your own
As you have seen, the road to correctly applying the IID is not without pitfalls. But it’s well worth the effort. In this labyrinth of procedures, specialised support is a common thread running through the whole maze – a way of optimising profits and preparing for future tax payments, and at the same time getting the approach right. However, only one company in four is currently benefiting from the support of experts. It would be a shame to miss out on it and find yourself entangled in the intricacies of administration, or even worse, faced with a tax adjustment.