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Tax deduction

Innovation income deduction

Favorable Tax Measure

Since July 1, 2016, Belgian companies or foreign companies with an establishment in Belgium can benefit from tax deduction for innovation profits, referred to as innovation income deduction. Up to 85% of a company’s net profit resulting from innovation is exempt from corporate taxation. This results in an effective tax rate of 5.10% on qualifying profits.

Conditions

In comparison with the former patent income deduction, the scope of the current innovation income deduction has been considerably extended. Innovation income deduction applies on profits arising from intellectual property rights including pending or granted patent documents, supplementary protection certificates (SPCs), plant variety rights, orphan drug rights and copyright-protected software. The deduction also applies to royalty income which has to be in line with the arm’s length principle.
The company applying for the innovation income deduction is full owner, co-owner, usufructuary (“vruchtgebruiker”), licensee or rights owner (“rechtenhouder”).

Calculating innovation income deduction

The innovation income deduction is calculated on the net income generated by the qualifying intellectual property (IP) rights (“net qualifying income”). Net qualifying income equals the gross IP income minus current-year expenditures for the development of the IP asset. Such qualifying expenditures include R&D expenses related to qualifying IP rights, expenditures for the acquisition of IP rights, expenditures for R&D outsourcing to related or unrelated parties, and prior-year expenditures incurred in financial years ending after June 30, 2016. The recapture of the latter expenses can be spread over a maximum of 7 years.

The innovation income deduction is calculated using the following formula:

  Innovation income deduction =  
 

((qualifying expenditures x 130%)/overall expenditures)

x 85% x net qualifying income

 

The result of the fraction is capped at 1, as the maximum exemption level amounts to 85% of the net qualifying income.

There are special documentation requirements for companies that want to apply the innovation income deduction. All elements used for the calculation of the innovation income deduction, such as gross IP income and R&D expenses related to qualifying IP rights, must be documented.

Former patent income deduction

The patent income deduction system was abolished on July 1, 2016. The regime will, however, remain available for a ‘grandfathering period’ of 5 years, i.e. until June 30, 2021. The patent income deduction regime applies to patents rights requested before July 1, 2016 and to improved patents and patent licenses acquired prior to July 1, 2016. When opting for the patent income deduction regime, it is not possible to apply for the innovation income deduction in relation to the patent for the taxable periods ending before July 1, 2021.

Further information can be found on the Vlaio.be website (in Dutch)

Please feel free to contact us should you require more information.