jueves, 29 de septiembre de 2016

Belgian government plans replacement for patent income deduction

The Belgian government is preparing for the introduction of a new “innovation income deduction” (IID) to replace the patent income deduction (PID) that was abolished as from 1 July 2016. The PID was abolished to bring Belgium in line with the recommendations of the OECD in its report on
BEPS action 5 (countering harmful tax practices) and related discussions at the EU level. A conditional “grandfathering” rule will allow taxpayers to claim the “old” PID regime until 30 June 2021 with respect to certain qualifying intellectual property (IP) rights.

The planned IID would be compliant with the “modified nexus approach” agreed upon within the OECD and the EU Code of Conduct group, and is expected to be adopted before the end of 2016. Once enacted, the IID, in principle, would apply retroactively as from tax year 2016 (but only for financial years ending on or after 1 July 2016).

Although the “pre-draft” legislation has not yet been finalized (i.e. it is still under discussion by the government), there seems to be some consensus on the framework for the IID. The general principles of the new IID regime would be similar to the previous PID regime, in that the IID would provide a tax-specific deduction for qualifying IP income arising from qualifying IP rights. However, some major changes are expected, compared to the previous PID regime.

The main features of the proposed regime are as follows:

Qualifying IP rights: Similar to the previous PID regime, the IP rights that qualify for the planned IID regime would comprise patents and supplementary protection certificates of which a company is the full owner, co-owner, usufructuary, licensee or exclusive right holder. However, the list of qualifying IP rights would be expanded and reportedly could include certain plant variety rights and orphan drug rights (requested or acquired on or after 1 July 2016), as well as copyrighted software (generated on or after the same date).

It is possible that the IID may be able to be applied on a provisional basis from the time a qualifying IP right is requested (subject to recapture if the IP right ultimately is not granted), as opposed to the PID regime that could apply only from the time qualifying IP rights were granted.

Qualifying IP income: The income streams to which the new IID regime would apply likely would comprise the following income elements, to the extent that these are part of the taxable results of a Belgian company or a Belgian permanent establishment of a foreign company and calculated at arm’s length:

  • License fees;
  • IP income embedded in the sales price of products/services;
  • IP income embedded in the production process; and
  • Compensation for damages for IP right infringements, awarded on the basis of a judicial decision, amicable settlement or insurance agreement.

Quantification of deduction: The most significant changes compared to the previous PID regime relate to the quantification of the deduction. The deduction under the planned IID regime would be calculated in three steps, in line with the modified nexus approach:

  • Calculation of the net amount of qualifying IP income;
  • Application of a “modified nexus” fraction; and
  • Multiplication of the result by the IID rate.

The amount of the IID calculated would be deductible from taxable profits. Contrary to the PID regime, any excess IID reportedly could be carried forward for use in future tax years.

Unlike the PID regime (which, as a general rule, applied on a gross basis), the IID regime would apply to only the net amount of qualifying IP income that exclusively relates to a qualifying IP right (i.e. the gross qualifying IP income related to the qualifying IP right, less the “overall expenditure” deducted as an expense and borne in the taxable period). In principle, the net income would have to be determined separately for each qualifying IP right (although it also could be determined for each type or group of products or services in certain cases).

Although this has yet to be clarified, the IID regime reportedly would include a “recapture” rule that would require taxpayers to first use certain overall expenditure relating to a qualifying IP right before being able to claim the IID on the net income arising thereon, and a “ventilation” rule, under which current-year or carried-forward negative net IP income from a qualifying IP right would need to be deducted from positive net IP income earned on other qualifying IP rights.

The amount of net qualifying IP income calculated would have to be multiplied by a specified modified nexus fraction, which, in principle, would have to be determined separately for each qualifying IP right (or each type or group of products or services). That fraction, in essence, would correspond to a cumulative amount of qualifying expenditure over a cumulative amount of overall expenditure.

Qualifying expenditure would have to directly relate to a qualifying IP right, and would not include, for example, interest payments and costs related to real property. Overall expenditure generally would comprise the same expenses as qualifying expenditure, with the addition of certain expenses incurred by the taxpayer in acquiring the qualifying IP right and certain expenses incurred by the taxpayer in relation to outsourcing to a related party.

The amount resulting after calculating net income and applying the modified nexus fraction reportedly would be eligible for a 90% deduction (compared to 80% under the old PID regime).
Taxpayers would have to prepare and retain documentation regarding each IP right (or each type or group of products or services).

Taxpayers that are eligible to continue applying the PID regime until 30 June 2021 under the grandfathering rule would need to choose between claiming the PID or the IID regime (for the period up to 30 June 2021). The government likely will make this choice irrevocable, with the result that taxpayers that have opted to apply the PID regime under the grandfathering rule would not be able to “switch back” to the IID regime, and vice versa.

Source: Deloitte

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