Software and innovation deduction: Belgium is the place to be! 23
1 Innovation income deduction (adopted by the Chamber of Representatives on 2 February 2017)
R&D incentives Innovation income deduction Patent income deduction 85% exemption of net innovation income resulting in 5,1% effective tax on innovation income Applies to a broad category of IP income both from licensing and sales 80% exemption of gross patent income resulting in 6,8% effective tax on patent income Applies to patent income derived from licensing and sales R&D investment deduction / tax credit One-time / spread investment deduction resulting in tax savings up to 6,5% of qualifying R&D investments Alternative: equivalent R&D tax credit Employment related incentives 80% payroll withholding tax exemption for qualifying researchers Expat status for foreign researchers temporarily assigned to Belgium Remuneration for copyright transfer Other incentives Exemption of regional R&D grants Foreign tax credit Notional interest deduction for equity funded R&D activities 3
Application in time Innovation income deduction ( IID ) replaces patent income deduction ( PID ) that was abolished as from 1 July 2016. Grandfathering: for patents requested or acquired before 1 July 2016, taxpayers can still apply PID until 30 June 2021 (irrevocable option). To be decided per IP right. 1/7/2016 1/7/2021 1/1/2016 1/1/2017 1/1/2018 1/1/2019 1/1/2020 1/1/2021 PID IID Qualifying taxpayers IID is available to Belgian resident companies and Belgian PE s of foreign companies. There are no specific conditions for SME s. 4
Qualifying intangibles (1) A company should have the full ownership, co-ownership, usufruct or licence of or right on: Patents and supplementary protection certificates. Breeders rights. Orphan drugs. Data and market exclusivity. IP of copyrighted software. Trademarks and other marketing related intangibles never qualify for IID. 5
Qualifying intangibles (2) IP of copyrighted software must: Result from a research or development project as defined for the purposes of the partial exemption of wage withholding tax. It is sufficient that activities qualify as a research or development project as defined for the purposes of the partial exemption of wage withholding tax. It is not required that the exemption actually applies. Other conditions for claiming this exemption may not be fulfilled (e.g. development by persons not having a qualifying degree or freelancers). Taxpayers may request a binding advice from BELSPO. If the taxpayer did not request a binding advice from BELSPO, the tax authorities may do so. Not have generated income before 1 July 2016. A derivative work or adjustment of an existing computer program can be new. If a copyrighted basis computer program generated income before 1 July 2016, income from a derivative work or adjustment that did not generate income before 1 July 2016 may still qualify. 6
Qualifying intangibles (3) For an activity to be an R&D activity, the OECD provides that it must be: Novel Creative Uncertain Systematic Transferable and/or reproducible Innovation is almost always R&D. 7
Qualifying intangibles (4) The OECD has specific guidelines for classifying software development as R&D: Completion must be dependent on a scientific and/or technological advance, the aim must be the systematic resolution of a scientific and/or technological uncertainty. Software that is part of an overall R&D project (e.g. to record its different stages) as well as R&D associated with, or embedded in, software as end product could be classified as R&D. Software development is an integral part of many projects that in themselves have no element of R&D. The software development component of such projects, however, may be classified as R&D if it leads to an advance in the area of computer software. An upgrade, addition or change to an existing program or system may be classified as R&D if it embodies scientific and/or technological advances resulting in increase of stock of knowledge. Use of software for a new application or purpose does not by itself constitute an advance. Software-related activities of a routine nature are not to be considered R&D. 8
Qualifying intangibles (5) The OECD lists examples of activities that can or cannot be considered R&D: R&D Development of new operating systems or languages Design and implementation of new search engines based on original technologies Resolution of conflicts within hardware or software based on the process of re-engineering a system or network Creation of new or more efficient algorithms based on new techniques Creation of new and original encryption of security techniques Experimental development new software for home banking R&D related to e-commerce applications, electronic banking, Internet-related services. Mathematical research relating to financial risk analysis Development of risk models for credit policy Investigating consumer behaviour for purpose of creating new types of banking services Research to identify new risks that need to be taken into account in insurance contracts Not R&D Adding using functionality to existing application programs (including basic data entry functionalities) Development of business application software and information systems using known methods and existing software tools Creation of websites or software using existing tools Use of standard methods of encryption, security verification and data integrity testing Customisation of product for particular use, unless knowledge is added that significantly improves the base program Routine debugging of existing systems and programs, unless this is done prior to end of experimental development process Etc. 9
Qualifying income Different categories of income may qualify: Licence income. Income embedded in sales income, i.e. the licence fee that a third party would pay if that third party produced the goods or delivered services on the basis of a licence granted by the company. Income derived from process innovation. Indemnities received on the base of a court/arbitral decision, amicable settlement or insurance contract. Proceeds derived from the sale of an IP right that has the nature of a fixed asset and which was (1) created no later than during the previous taxable period or (2) acquired no later than in the course of the last 24 months (reinvestment condition applies within 5 years). The arm s length nature needs to be respected. 10
Modified nexus In order to install a direct nexus between the income qualifying for the IID and the expenditures contributing to that income, the following formula is to be applied: Qualifying expenditure incurred to develop IP asset Overall expenditure incurred to develop IP asset x 85% x Net innovation income = Innovation income deduction Qualifying expenditure Expenditure directly connected to IP asset incurred by the company itself or compensation for outsourced R&D activities to non-related companies. Excl.: interest, building cost, acquisition costs, etc. Uplift of 30%. Proportional inclusion if costs are not exclusively related to the IP asset. Overall expenditure Cumul of years Qualifying expenditure, expenditure for related party outsourcing and acquisition costs for the qualifying intangibles. Current year Gross income of current year Worldwide income in the Belgian taxable result. Irrelevant where IP is protected. Deduction of overall expenditure of that year Incl.: employee costs, depreciations of acquired IP, etc. Excl.: interest, building cost, acquisition costs, etc. Recapture of costs applies in certain cases 11
Other features Temporary exemption while patents, breeder s right, orphan drugs or data and market exclusivity are still under request. As the copyright of software automatically exists without request (if certain conditions are met ), there is no temporary exemption. Possible carry-forward of unused IID without any limitation in time or amount. Tax neutrality in case of tax free transactions. 12
Tax ruling Possibility: Qualifying intangibles. Qualifying innovation income. Calculation method for embedded income. Necessity: Deviation from modified nexus ratio Ratio equals or exceeds 25%. Before 30% uplift. Rebuttable presumption (if proof of higher added value). Be mindful: exchange of rulings in EU countries. 13
Documentation requirements Taxpayers have to carefully track and trace the qualifying expenditure and qualifying income. Supporting documentation per IP such as: Actual value of IP acquired from related company. Gross amount of the qualifying income. Overall expenditure of current year. Qualifying and overall expenditures of all years. Transitional period up to and including tax year 2019. Specific report must be added to the tax return. 14
Example IID in the hands of the Belgian company Own development Costs in previous years (5.000) Belgian company Licence (10.000) 10% annual royalty Foreign licensee Product sales (100.000) Customers Innovation income: (10.000) Qualifying expenditure: (5.000) Overall expenditure: (5.000) Of which overall expenditure in current year: (0) 1. Qualifying expenditure + uplift Qualifying expenditure 5.000 + 30% uplift 0 5.000 2. Overall expenditure Qualifying expenditure 5.000 + expenditure for related party outsourcing 0 + acquisition costs 0 5.000 3. Net innovation income Innovation income 10.000 - overall expenditure in current year 0 Net innovation income 10.000 4. IID 10.000 x 85% = 8.500 5. Effective tax rate ( ETR ) [(10.000 8.500) *33,99%] / 10.000 = 5,1% 15
2 Conclusions and key takeaways
Conclusions and key takeaways 1 Time to act! 2 Assess feasibility of IID for software and derivative work or adjustments 3 Estimate your benefit 4 5 Get confirmation from BELSPO and/or Ruling Commission Tracking and tracing 17
Questions?
Contacts Tom Wallyn Director +32 9 268 80 21 tom.wallyn@pwc.com This presentation does not provide a comprehensive or complete statement of the taxation law of Belgium. It does neither cover the taxation principles of any other country referred to in this presentation. It is intended only to highlight general topics which may be of interest to our clients. For questions relating to this document please contact your local tax services advisors or the specialist listed in this document. This document has been prepared for general guidance only, and does not constitute professional advice. You should not act upon the information contained in this memo without obtaining specific professional advice. The materials contained in this presentation were assembled in February 2017 and were based on the law enforceable and information available at that time. provides services in compliance with the deontological and other professional standards of the IAB/IEC, taking into account the relevant legislation and regulations applicable. cannot be held liable for the effects of future possible changes with possible retroactive effect - to these statutory and regulatory provisions, nor can be responsible for the effects of possible shortcomings, faults or breaches which are committed before s assistance. To that extent, will not consider whether the facts submitted to or the topics included in this document may give rise to a finding that the Client or any other party is the recipient of State aid within the meaning of Article 107 of the Treaty on the Functioning of the European Union No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Business Advisors bcvba, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. 2017 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.