The deduction for innovation income (IID) is a real success. A tax incentive not to be missed by obtaining the commitment (a ruling or advance ruling) of the Advance Rulings Service (SDA) of the Ministry of Finance.
Belgium is one of the most generous countries in terms of R&D taxation. But while the mechanisms are simple to understand, they are sometimes difficult to apply. The IID is no exception to the rule, and despite rising figures, the system is still largely underused by companies. Some believe (wrongly) that they are not concerned, others take the plunge, but without exploiting its full potential or taking ill-considered risks. This is due to administrative red tape and the complexity of implementation, but also to the “fuzzy” interpretation of the rules and conditions. It is no coincidence that almost half of all R&D-related tax audits result in an adjustment. This legal and fiscal uncertainty dampens the spirits of managers, even though they have everything to gain by taking up the IID.
Why a ruling?
A ruling = an “advance ruling” of the tax authorities, which functions as a legal security “offer” to taxpayers.
The Ministry of Finance thus undertakes to accept and respect a situation, an operation or a methodology that will produce its tax effects in the future. Once validated, the administrative decision sets the applicable conditions in stone. The IID falls fully within this framework, since nothing is automatic, very technical and the legal conditions are multiple.
Indeed, a series of questions must be answered beforehand and choices must be made “without a net”:
- to which intellectual property (IP) rights does IID apply?
- Is the company’s software eligible?
- what income and expenses are relevant for the application of the 85% deduction?
- is the nexus ratio correctly calculated?
- Is the file sufficiently documented?
The application for a ruling is more than advisable, it is practically unavoidable. A positive upfront ruling means legal and tax certainty for a period of 5 years for patents and 3 years for computer programs. Agreements with the tax authorities that are also renewable.
2 pillars are fundamental
1. A strong report
All elements of the file are subject to the interpretation of the tax authorities. The “innovative” nature of the software, the determination of qualifying income, the calculation of the nexus ratio, etc. And as the IID is a deduction, the burden of proof is on the company. It must be able to justify its choices, methodology and calculations to the administration.
Moreover, the rules of this documentation and traceability duty have been specified by a Royal Decree at the end of 2019.
To be demonstrated:
- the real value of the intellectual property right, when acquired from an affiliated company;
- the amount of innovation revenue taken into account, as well as the method chosen to identify the gross revenue;
- no income generated before 1st July 2016;
- the amount of direct and indirect costs to be deducted from innovation revenues;
- the calculation of the nexus ratio, explicitly distinguishing between the different categories of R&D expenditure.
2. A prudent timetable
Nothing should be left to chance in this respect in order to meet the requirements of the administration.
- BELSPO’s opinion: R&D or not . Either, have the “innovative” aspect of the IT program validated and ensure that it is eligible for the IID by contacting the BELSPO (Public Programming Service for Science Policy).
- The next step is to appear before the Advance Rulings Department (SDA) of the Ministry of Finance to defend its methodology for the application of the IID, in particular the determination of the gross innovation income and the calculation of the nexus ratio.
- The first action: submit (by e-mail or post) a pre-filing request to the SDA by the end of January at the latest (for fiscal years ending on December 31st). This is an initial proposal, which will be adapted in the light of questions from the tax authorities and your supplements. If the tax year does not coincide with the calendar year, you should start the process at least 8 months before the deadline for the tax return.
- Filing: Once the tax authorities have agreed to the details of the approach (explained in the pre-filing), the next step is the official request (called a filing), which must be submitted before the end of June so that the ruling can be issued before the end of September. Indeed, the deadline is generally until the beginning of October to submit the tax return.
- The ruling: As soon as your file is validated by the tax authorities, the entire operation is definitively protected. No subsequent inspection can call into question the methodology developed in consultation with the SDA. The tax benefits linked to the IID are therefore guaranteed!