Monday, 27 March 2017

Belgium: Innovation income deduction now effective

The new Belgian innovation income deduction (IID) legislation was published in the official journal on 20 February 2017 and applies retroactively as from 1 July 2016. The IID, which is in line with the OECD recommendations on BEPS action 5 (countering harmful tax practices), replaces the patent income deduction (PID) that was abolished as from 1 July 2016 (however, a conditional “grandfathering” rule allows taxpayers to claim the PID regime until 30 June 2021 with respect to certain qualifying intellectual property (IP) rights).
Qualifying IP rights include the following:

  • Patents;
  • Supplementary Protection Certificates (SPCs);
  • Plant variety rights (filed as from 1 July 2016 or acquired after 30 June 2016);
  • Orphan drugs (filed as from 1 July 2016 or acquired after 30 June 2016, but limited to the first 10 years of registration in the European register for orphan drugs);
  • Data or market exclusivity granted by a public body (granted after 30 June 2016); and
  • Computer programs protected by copyright, including upgraded software (if certain conditions are fulfilled), resulting from R&D activities and that have not generated income before 1 July 2016.
The types of income streams that may qualify for the application of the IID include the following:
  • Income from licenses;
  • IP income embedded in sales products or services;
  • IP income embedded in production processes;
  • Compensation for damages of IP right infringements; and
  • Capital gains (if certain conditions are fulfilled).

The IID regime applies only to the net amount of qualifying IP income that exclusively relates to a qualifying IP right.
For the first fiscal year in which the new IID regime is applied, relevant expenses connected to this fiscal year, as well as historic expenses of previous fiscal years that ended after 30 June 2016, must be taken into account. The historic expenses may be deducted immediately or spread over up to seven fiscal years.
The amount of net qualifying IP income subsequently must be multiplied by a “modified nexus fraction,” based on the ratio of “qualifying expenditure” directly related to a qualifying IP right to “overall expenditure,” which must be determined separately for each qualifying IP right (or type or group of products or services), on which an uplift of a maximum of 30% may be applied.
The amount resulting after calculating net income and applying the modified nexus fraction will be eligible for an 85% deduction on net innovation income (compared to 80% on gross patent/SPC income under the old PID regime).

Source: Deloitte