For several years, the patent income deduction (PID) was the dominant tax incentive for innovation. Since 1 July 2016, this measure has been gradually replaced by the Innovation Income Deduction (IID). Introduced in 2007, the IID “allowed” for a reduction in the tax burden on income from patents and supplementary protection certificates.

This is a way of stimulating R&D activities in Belgium, but also of attracting foreign companies, thanks to a deduction of 80% of gross income. This measure has, among other things, helped to anchor giants of the global pharmaceutical industry in Belgium. Considered a little too ‘favorable’ by the OECD, Belgium was encouraged to revise the measure, thus making way for the IID! The deduction is now 85%, but on net income from intellectual property (IP) rights, in contrast to the IID, which was largely on gross income.

Henceforth, IP development expenses should be deducted to determine net innovation income. It should be noted that the legislator has also broadened the sources of eligible income. The scope is no longer limited to patents, but now includes other IP rights, such as copyrighted software, plant breeders’ rights and orphan drugs.

The calculation of the IID is one of the stumbling blocks of this measure, even if the concept is easy to understand:

  • Identify software-related revenues (individually, by type or by product group);
  • As well as the expenses resulting from its development.
  • Calculate the nexus ratio.
  • Enter this data into the following formula: IID = (gross revenue – R&D expenditure) x (“Nexus ratio x 130%)” x 85%.

It is necessary to be able to precisely determine each element of the equation.

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