The recent introduction of a favourable tax exemption for patents should provide a significant fillip for companies involved in research and development in Belgium
Research and development is the big winner from the introduction of a favorable tax regime for patent income in Belgium.This regime should, together with the notional interest deduction, further attract foreign investors to Belgium and be welcomed by existing Belgian companies and branches.
The new tax incentive for patents comes down to an 80 percent tax exemption of patent income as a result of which the nominal tax rate for such income decreases from 33.99 percent to 6.8 percent.The effective tax rate will, however, even be lower as a result of tax deductible costs and, to the extent the investments are equity funded, as a result of the notional interest deduction.
The new incentive is, technically speaking, a tax deduction on the basis of which an 80 percent notional expense can be deducted from royalty or other income generated by patents which were developed or acquired by or licensed to Belgian corporate taxpayers (that is Belgian resident companies and Belgian branches of foreign companies). For patents acquired by Belgian corporate taxpayers (through straight forward acquisition, capital contribution or on the basis of a license), the new regime applies in principle only if the patent is further developed by the Belgian taxpayer. It is in this respect irrelevant if the actual development takes place in Belgium or abroad.The development should nevertheless be done by a business department or branch of activity of the Belgian IP owner, which requires a certain substance. It is on the other hand possible to have certain R&D activities performed by other entities, for example through contract R&D.
The 80 percent exemption is applicable to both royalties derived from IP licenses and to part of the income derived from the production of goods or delivery of services for which the patents are used. It is, however, not applicable to capital gains realised upon a transfer of the patent.
In order to limit the budgetary impact of this tax incentive, the 80 percent exemption is only applicable to so-called new patent income or, in other words, to patents which have not yet generated any income through sales of products or services in the hands of the taxpayer, a licensee of the taxpayer or a related company.
The calculation of the 80 percent exemption should be relatively simple with respect to royalty income as such income can easily be identified and separated from the other income of the taxpayer. It should in this respect be noted that only an arm’s length royalty income is eligible for the 80 percent exemption. In case the patents are used for own production or delivery of services, the 80 percent exemption is to be calculated on the basis of an arm’s length royalty which would have been received by the IP owner if the patent was licensed. A transfer pricing study might be recommended in order to determine such arm’s length royalty.
How it works
In general, the 80 percent exemption applies to the gross patent income. At the same time, the related expenses remain fully deductible according to the corporate income tax rules. Depreciation of patents acquired or license fees paid with respect to patents licensed to the Belgian taxpayer have however to be deducted from the basis for the 80 percent exemption.
Any excess amount of tax deduction resulting from the 80 percent exemption can, in absence of sufficient taxable income, not be carried forward or back and is thus definitely lost. The Belgian foreign tax credit granted with respect to foreign withholding tax withheld on royalties paid to Belgian taxpayers, which is in principle equal to 15/85 of the net royalty received, is for the royalties which benefit from the 80 percent exemption limited to the foreign withholding tax effectively withheld with a maximum of 15 percent. Such foreign tax credit can furthermore only be credited against the Belgian income tax due on the relevant royalty.
The proposal of Belgian government to introduce the 80 percent exemption for patent income was approved by Belgian parliament in April and published in May and applies to patent income generated during financial years ending on or after December 31, 2007. It might therefore already apply to current patent income realised by Belgian companies and branches.
This new tax incentive should further promote Belgium as an attractive location for R&D centers, for which certain tax incentives have already been introduced. The 80 percent exemption is also to be seen in the context of the EU Commission’s communication of November 22, 2006 on the more effective use of tax incentives in favor of R&D.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
