Is intellectual property neutral from a taxation point of view? No. There are precise provisions that affect the tax regime of investments and revenue linked to your intellectual assets. It is better to know and plan ahead. Along with its partners, GEVERS allows you to optimize your rights and get the most out of them.
Optimising and stimulating
Innovation is a priority throughout Europe. A number of countries have implemented fiscal policies that aim to promote research and development and more broadly innovation. For example, revenue from patents, brands and copyright can be subject to a corporation tax exemption. In the same way, investments in R&D – including human resources – may serve as a basis for tax relief. Lastly, flows of royalties from one country to another may also be subject to special fiscal treatments.
Naturally the conditions are many and often complex, and options vary from one country to the next, and even from situation to situation. Along with our specialist partners, we are able to analyse each case and offer you personalised solutions. The objective is always the same: to allow you to fully reap the rewards of your intellectual property investments.
New Belgian IP tax regime
We knew it was time for changes in the European IP tax regimes and there it is: The new Belgian IP tax regime is now voted and into force with retroactive effect from July the 1st 2016.
Following the OECD/G20 “Base Erosion and Profit Shifting Project” (a specific action launched in order to tackle tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity), and more precisely its Action 5 focusing on the Harmful Tax Practices in the context of IP regimes, all the European IP tax regimes needed to be reviewed and adapted to comply with the new “modified nexus approach” prescribed by the OECD. This agreed methodology aims at assessing whether there is substantial activity so that taxpayers can only benefit from IP regimes where they engaged in research and development and incurred actual expenditures on such activities.
While all the countries have to enforce this new approach in their national legislation by July the 1st 2016, the old systems may still apply, under certain conditions, during a period of 5 years (“grandfathering period”) starting on July the 1st 2016.
What is at stake for Belgian companies?
Many Belgian companies will have the choice, for IP assets qualifying to both regimes (i.e. granted patents filed or acquired before 1.07.20161 ), to apply for:
→ Either the old system (“Patent income deduction”), providing a 80% deduction of the “gross patent income”
→ Or the new tax regime (“Innovation income deduction”), which provides a 85% deduction of the “net innovation income” corrected by a specific ratio.
By opting for the old system, the Belgian tax payer will not have the possibility to go for the new regime before the end of the grandfathering period (irrevocable choice).
1 Acquired before 01.01.2016 in case of acquisition from an affiliated company.
What is exactly the new Innovation deduction regime?
The new Belgian “Innovation income deduction” regime provides, for Belgian corporate tax paying companies, a tax exemption for 85% of the “adjusted” net innovation income related to eligible IP rights.
What are the eligible IP Rights?
Next to the patents and the Supplementary Protection Certificates (already eligible for the former “Patent Income Deduction” regime), the government extended the application of the regime to:
→ Plant-breeding Rights applied for after 30 June 2016;
→ Orphan drugs applied for after 30 June 2016;
→ Data and Market Exclusivity granted by public authorities;
→ Computer programs, developed through a specific R&D program approved/approvable as such by public authorities and did not generate income before July 1st, 2016.
In order to be eligible, these IP rights must have been developed or partly improved (in case of acquired right) by the company.
The company can either be the owner of these IP rights, or a joint-owner, a licensee or a beneficial owner.
Contrarily to the old Patent Income Deduction system, the Belgian companies may already, temporarily, benefit from the tax exemption on the basis of a pending right (i.e. filed but not granted yet) through the creation of a dedicated reserve in the balance sheet. At the end of the IP granting procedure, either the right is granted and the tax benefit is definitively acquired by the company, or the right is not granted and the company must return the reserved tax benefit related to this IP right to the tax authorities (+ a legal interest rate).
How to calculate the amount of deduction?
The amount of the deduction will correspond to a share of 85% of the net innovation income, thus representing a real tax rate of 5,1% applied on this net innovation income.
The qualifying (“gross”) innovation income corresponds to the following revenues generated by companies on the “commercial exploitation” of their eligible IP assets2 :
→ License revenues received by the company in the relevant year;
→ Notional royalties computed on the direct sale of IP-covered products and/or services. These royalties should reflect the arm’s length rate that would be practiced between unrelated companies in a similar context;
→ Indemnities related to an IP litigation case;
→ The amounts earned through the assignment of the IP right, subject to specific reinvestment conditions.
In order to calculate the final deduction basis the following formula needs to be applied to the gross income:
The Net Innovation income is calculated by deducting from the gross income the total R&D expenditures incurred by the company on the IP-covered technology (specific rules may apply for the determination and the deduction of these R&D expenditures).
The Nexus ratio is a corrective percentage aiming at taking into account the real R&D activity of the tax payer:
→ The numerator considers all the R&D incurred by the company in direct connection with the IP asset (in the past and in the relevant fiscal year), without taking into account (i) the R&D activity outsourced to an affiliated company3 and (ii) the acquisition costs of the IP
→ The denominator reflects the global R&D expenses of the company in connection with the IP asset (i.e. including the limitations (i) and (ii) mentioned above).
The uplift corresponds to a markup of 30% that can be applied on the resulting corrected net income, provided that the marked-up nominator may never be over the denominator.
2 If the revenues may not be identified by IP asset, the company may consider these revenues by type or group of products/services.
3 Unless this affiliated company outsourced this R&D acctivity to an independent third party without margin.
So what are actually the main differences from the old regime?
→ The spectrum of eligible IP assets is broadened, including patent pending applications, computer programs, orphan drugs and other data and market exclusivities;
→ The spectrum of qualifying income is also enlarged, incorporating the earnings from the sale of the IP asset and indemnities received through litigation proceedings;
→ The part of deduction is higher (85% compared to 80%) but is calculated on a smaller cake (corrected net innovation income compared to the former gross patent income).
→ The benefits of the deduction (but also the negative impact the deduction of R&D expenses) are carried forward.
→ The new system requires an appropriate documentation to benefit from the deduction, meaning that the companies must set up an appropriate internal “track and trace” system of the relevant information.
Take contact with GEVERS IP Box team and discover how you can pay less tax thanks to your Intellectual Property.
Frédéric De Coninck
T. +32 (0)2 715 37 05