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How can you nail down the R&D aspect of your activities?

The number one niche tax for research and development in Belgium is called the “partial exemption from payment of withholding tax for researchers”. Known as the DPP, it is synonymous with an appreciable tax break on your payroll, provided you have a good grasp of its ins and outs. One of the key issues is how you actually define R&D. Not easy…

Research and development (R&D) are the lifeblood of major economies and many companies nowadays. At a time of profound change and major challenges, growth, competitiveness and innovation are linked more than ever. Investing in R&D has therefore become an imperative for directors and entrepreneurs. It is no coincidence that governments are striving to boost their respective business environments.

After lagging behind for some time, the European Union has been working hard to catch up with the Asian and American blocs, particularly through its 3% target. The goal is to encourage Member States to increase their R&D spending to 3% of GDP, with two-thirds of this to be borne by the private sector. Taxation represents a major lever in achieving this – something well understood by Belgium, which is often described as a “generous” nation in this regard. The incentive most valued by companies is the partial exemption from payment of withholding tax (DPP). Here is a reminder of the facts.

This tax system was introduced in the early 2000s. The principle is simple: under certain conditions, you have access to an exemption of 80% of the withholding tax paid to the State. This is a tax withheld at source on the salaries of researchers carrying out one-off projects or structured R&D programmes. The stated aim of the authorities is to create conditions where your company can hire high profile staff at a lower wage cost. In other words, to support Belgian scientific research by stimulating employment. Even though the calculations depend on each individual situation, the average payout can be up to 10,000 euros per year per researcher (between 15% and 25% in terms of benefit). This mechanism has continued to evolve over the years – by being extended to bachelor degree holders, for example – thus confirming its success. And for good reason: the DPP is open to all employers, regardless of the subject of the research. Better than that – this niche is of great interest from a cash flow point of view, since you benefit from an immediate cash advantage. This is a godsend in times like these, when liquidity is a major issue!

You may want to activate the DPP for your company, but the problem is that the criteria are subject to interpretation, making the task perilous and the risk of a tax adjustment real! You will need to analyse multiple parameters, in particular the definition of “one-off projects or structured R&D programmes”. What is meant by research and development? This is one of the stumbling blocks of the DPP that sometimes leads to under-use of the mechanism or, worse, to situations with serious financial consequences. This is why it is crucial to cover your back by “locking in” the R&D element of your operations – in other words, by answering the question: “which activities are eligible for the DPP?” The question may seem trivial, but it is fundamental. For example, do you perform blood tests as part of routine check-ups? This is outside of the scope of R&D. On the other hand, if your blood tests are part of a project to evaluate patients taking a new pharmaceutical product, then you are talking about R&D. The nursing staff who carry out these tests could, in this case, benefit from the exemption…

For more than half a century, the OECD’s Frascati Manual has provided the basis for a common language for dealing with the subject and has become a key reference document. It is no coincidence that its definition of R&D has largely inspired most national regulations. It says on this subject:

“Research and experimental development (R&D) comprise creative and systematic work undertaken in order to increase the stock of knowledge – including knowledge of humankind, culture and society – and to devise new applications of available knowledge.”

It should be noted that the term “R&D” refers to three types of activity:

  • Fundamental research: this is all “experimental or theoretical work carried out with the aim of acquiring new knowledge about the foundations of phenomena and observable facts”, but without envisaging at the outset a specific application or use.
  • Applied research: on the other hand, this type of research is intended to achieve a goal or practical objective determined upstream.
  • Experimental development: this is all “systematic work based on existing knowledge, with a view to launching the manufacturing of new materials, products or devices, establishing new processes, systems and services, or considerably improving existing ones”.

Behind these definitions, the Frascati Manual also provides five essential criteria, which help to delimit the scope of R&D more clearly.

  1. Innovation
    The activity must aim at obtaining new discoveries (results, methods, techniques, models, etc.), which do not yet exist in the economic or industrial world. But these may be variations or derivatives of existing outputs…
  2. Creativity
    It must be based on original and non-evident notions and hypotheses, likely to improve knowledge. This means no “routine” tasks.
  3. Uncertainty
    The final result must be uncertain in character. In other words, it is not possible to anticipate precisely either the type of output or the cost (and time allocation) of the project in relation to the objectives set.
  4. Systematic
    R&D is a formal activity, which must also be planned, documented and budgeted for.
  5. Transferable and/or reproducible
    Finally, it must lead to new knowledge that can be reproduced or transferred, enabling other researchers to carry out their own R&D activities.

Do your activities fit perfectly with the definition of R&D? If so, you still need to be able to justify your viewpoint. And for good reason – the tax authorities are very careful and sometimes very formal. Are you overly optimistic, relying on your social security service to carry out your DPP activities? But at the risk of putting a damper on things – the burden of proof always falls on you. Too cautious? You are probably missing out on a major financial windfall. Balance is essential, and this relies on your ability to document your approach with consistency, expertise and diligence. In addition to notifying BELSPO (with annual updates) and getting all the documents you need to prove your case (degree certificates, timesheets, withholding tax declarations, etc.), you will then be invited to justify the R&D aspect of each of your projects or programmes. Specifically:

  • Make use of regional subsidies offered for research, clinical studies, collaboration agreements, patent applications, etc. These elements attest to the R&D character of a one-off project or structural programme here.
  • Put together a well-written scientific report. This supports your entire tax structure and allows you to justify your approach before BELSPO (Federal Public Service for Science Policy Programming), in accordance with the precepts of the Frascati Manual.
  • Ask for the binding opinion of BELSPO. This is an important asset to have up your sleeve to help you secure your route to the DPP. This request for an opinion is optional – the tax authorities may also ask BELSPO to give its opinion – but is strongly recommended.

For the DPP, it is often a question of “no pain, no gain”. It’s a tax adventure that’s occasionally laborious and risky, since one tax audit in two ends in a tax adjustment, so all the more reason to make sure you’re in good hands…

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