Belgium, for many reasons, could be considered a prime location for companies to conduct research and development (R&D) and generate revenue from intellectual property rights. The tax environment in this area has also been designed to support R&D, from the early development and investment stages through to the final stage of successful development.
Thanks to the “Innovation Income Deduction,” companies pay an effective tax rate as low as 3.75% on the qualifying income. They can also receive a wage subsidy on their researcher’s salaries and an additional tax credit based on investment made in R&D equipment and patents acquired. The latter incentive can even be converted into a cash payment if it takes longer for the company to become profitable. In addition, R&D subsidies granted by the Belgian Regions are fully exempt from income tax.
This beneficial taxation regime for R&D activities has been updated over the years to address the concerns of the Organization for Economic Co-operation and Development (OECD) and the EU regarding fair taxation, as laid down in the so-called “Modified Nexus Approach.”
Below you can find an overview of the various R&D tax incentives that Belgium offers:
- Innovation Income Deduction (IID)
- Partial exemption from payment of withholding tax on wages paid to researchers
- Deduction of research and development costs
- Increased investment deduction or tax credit for research and development
- Tax exemption of regional subsidies
- Ruling practice
Our Global R&D Incentives Guide provides an overview of R&D incentives available throughout the world.
Innovation Income Deduction (IID)
Under the Innovation Income Deduction (IID) regime, companies can deduct up to 85% of their net innovation income from the taxable base, resulting in an effective corporate taxation as low as 3.75% (as from assessment year 2021).
The IID regime applies to Belgian companies or Belgian permanent establishments of foreign companies that are the full owner, co-owner, usufructuary or economic owner, license holder or (exclusive) right holder of a qualifying intellectual property right.
Qualifying intellectual property rights
The new regime is called “Innovation Income Deduction” because of the broader scope of the qualifying intellectual property rights (IPR). The deduction applies to income from patents or supplementary protection certificates, breeders’ rights, orphan drugs, data and market exclusivity and copyrighted software.
The qualifying income will include royalties and license fees, IPR income embedded in the sales price of goods and services, process innovation based on the IPR (reflecting what a third party should pay to have access to the IPR), as well as capital gains (the latter is subject to reinvestment in qualifying R&D within five years).
A specific requirement of the Modified Nexus Approach is that the beneficial tax regime is applied to the net IPR income and subject to a specific formula to weigh the taxpayer’s own contribution to the creation of the IPR. The following formula has been introduced to determine the income that can benefit from the preferential regime:
[qualifying R&D costs/total R&D costs] x net income from intellectual property
The costs of outsourcing R&D work to related parties or of IPR acquisitions are excluded from qualifying costs. Costs for outsourcing R&D to unrelated parties or made within the framework of a cost contribution arrangement are, however, considered qualifying costs. In addition, a lift-up of 30% of the total qualifying expenses for R&D is foreseen (without the fraction exceeding 1).
The unused deduction can be carried forward. The taxpayer can also benefit from the regime while a patent is still pending approval, but already generating income.
Partial exemption from payment of withholding tax on wages paid to researchers
Companies that employ researchers benefit from a partial exemption from payment of withholding tax on their wages. They must transfer only 20% of the withholding tax due on the wage of these researchers to the tax authorities, while they withhold the 100% that would normally be due. The measure has thus no impact on the individual income tax situation of the researchers and generates a cash subsidy for the employer.
- Companies that pay wages to researchers engaged in research projects conducted pursuant to partnership agreements with universities/colleges in the European Economic Area or with a recognized scientific institution;
- “Young Innovative Companies” that pay wages to employed R&D personnel;
- Companies that pay wages to researchers that work on R&D projects or programs and who have a doctor’s or master’s degree in applied sciences, exact sciences, medicine, veterinary medicine, pharmaceutical sciences, a degree in civil engineering or a master’s or equivalent degree in a scientific field or a combination of scientific fields. The partial exemption also applies to employees that hold a professional bachelor’s or equivalent degree in the fields of biotechnology, health care, industrial sciences and technology, nautical sciences, commercial sciences and business administration (limited to informatics and innovation). The exemption for bachelor’s degree holders is also 80%, but the total amount of the exemption for bachelor’s degrees is limited to 25% (50% for SMEs) of the total amount of the applied exemption for employees with a master’s degree.
Notification of research and development projects or programs
Organizations must register R&D projects or programs with the Belgian Federal Science Policy Department before applying the exemption.
Deduction of research and development costs
Increased investment deduction or tax credit for research and development
A percentage of the acquisition or investment value of certain assets that have been acquired or established during the taxable period and that relate to R&D is tax deductible. This deduction comes in addition to the normal – tax deductible – depreciation of these assets, leading to an overall tax deduction, which is higher than the assets’ value.
Qualifying fixed assets
- Fixed assets that promote the R&D of new products and advanced technologies that do not affect the environment or that aim to mitigate a negative effect on the environment.
Applicable rules and rates
The increased investment deduction can be applied as a one-off deduction. In that case, the deduction equals 13.5% of the acquisition or investment value (assessment year 2021).
The deduction can also be spread over the depreciation period of the fixed asset (this option is not available for patents). In that case, the annual investment deduction will be equal to 20.5% of the depreciation amount (for fixed assets acquired or established during assessment year 2021).
Carry forward to later assessment years
When the deduction cannot be (fully) set off against the profits of the taxable period, the (proportion of the) investment deduction that has not been used can be carried forward without any time limit and can be set off against the profits of the subsequent taxable periods.
Option for a refundable tax credit
Companies may opt for the application of a tax credit instead of the increased investment deduction.
In case of insufficient tax against which the tax credit can be set off, the credit can be carried forward to the following four assessment years. At the end of these four assessment years, the balance of the unused tax credit is refunded in cash.
Tax exemption of regional subsidies
Global R&D incentives guide
R&D tax incentive schemes have been widely adopted in advanced economies. This is because more countries have realized the importance of research and innovation for economic growth and have therefore added R&D incentives and increased their support of R&D, using grants and other forms of funding. Currently, over 50 jurisdictions have some form of an R&D incentive, and some countries offer multiple R&D incentives.
The effectiveness of R&D tax incentives has been the subject of much global debate and is well documented in academic studies and research. Although some early studies challenged the effectiveness of R&D incentives, the majority of the studies find that R&D incentives increase private investment and innovation, influence the location where companies conduct R&D and manufacture their products and also lead to a number of societal benefits.
For each jurisdiction and primary incentive, the KPMG Global R&D Incentives Guide provides the following:
- Overview or summary of the incentive and relief provided;
- Local definition of R&D;
- Eligibility requirements;
- Relevant dates, including statutory filings;
- Overview of the registration process and administrative and jurisdictional requirements; and
- Summary information on other applicable or related incentives.
How KPMG can help
The R&D Incentives practice at KPMG is comprised of a cross-border network of experienced engineers, accountants, and tax professionals located in member firms around the world. Addressing local issues with a global mindset, the mission of the practice is to help our clients maximize R&D incentives and benefits on a global scale to help create a competitive advantage.
Our network of professionals assists our clients in identifying, realizing and substantiating significant tax savings related to their investments in R&D in various countries. Our approach includes a coordinated, multijurisdictional R&D incentives review and analysis. Our professionals think beyond tax and aim to provide our clients with insightful business strategies that help enable the identification and documentation of R&D activities on a real-time basis, thereby maximizing benefits and driving higher returns on investments.
Decisions on where to conduct R&D activities involve many factors, including the availability of the necessary talent and the relative costs of labor, materials and facilities. In addition, R&D incentives and the impact of their costs on other tax positions may play a significant role in evaluating the after-tax cost of doing R&D in one country versus another.
Accordingly, our R&D Incentives team works to help clients manage taxation issues arising from:
- Cross-border R&D arrangements and tax considerations;
- Transfer pricing;
- Intellectual property status and transfers;
- Withholding taxes;
- Cross border tax considerations;
- Foreign tax credits; and
- Duties and tariffs.
The KPMG network ideally positions us to assist our clients in creating long-lasting value by evaluating both the available R&D incentives and the impact of R&D investments on overall tax posture relative to the business lifecycle.
For additional information regarding these services, do not hesitate to contact us.