Research & Development Incentives

Belgium is a prime location for companies to conduct research and development (R&D) and generate revenue from intellectual property rights. One reason is the tax environment, which has been designed to support R&D from the early development and investment stages through to the final stage of successful commercialization.

Thanks to the “Innovation Income Deduction,” companies pay an effective tax rate as low as 3.75% on their qualifying income. They can also receive a wage subsidy on their researchers’ 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. R&D subsidies granted by the Belgian Regions are also 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.” More recently, the R&D tax incentives have been updated to reflect the new Global Minimum Taxation Rules for large multinationals, also known as Pillar Two or GloBE rules.

The common Belgian corporate tax regime foresees a so-called “deduction for innovation income,” which has been in place since 2016 (compliant with Action 5 of the OECD BEPS Action Plan).

The headlines of the innovation income deduction (IID) are summarized below.

Qualifying IP Rights (IPR)

Patents and extended patent certificates qualify, as well as copyrighted software (developed by the taxpayer in the context of an R&D project or program), breeders’ rights, orphan drugs, and certain data and market exclusivity rights (based on European directives or other international legislation in the field of medicine and food regulation).

Types of qualifying income

The qualifying income includes royalties and license fees, as well as income embedded in the sales price of goods and services, process innovation based on the IPR (reflecting what a third party would be willing to pay to have access to the IPR), as well as capital gains (the latter subject to reinvestment in qualifying R&D within five years).

Deduction percentage

The deduction percentage amounts to 85% of the net qualifying income.

Determination of the net amount of qualifying income

A specific requirement of the modified nexus approach is that the beneficial tax regime is applied to the net IPR income (i.e., after deduction of R&D costs) 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 total net income from intellectual property

For the qualifying costs, the costs of outsourcing to related parties are excluded, contrary to the cost of outsourcing to unrelated parties which are considered as “qualifying costs.”

A uplift of 30% of the qualifying expenses is foreseen. However, this increase (30%) can never result in a fraction exceeding 1.

Other features of the IID

Unused deduction – due to a lack of taxable base – can be carried forward (indefinitely). Moreover, as from tax assessment year 2025, taxpayers have the option not to offset (a part or the full amount) of IID (both the IID of the year itself as well as IID carried forward) but to convert it into a non-refundable tax credit for innovation income. This tax credit for innovation income can be carried forward (indefinitely) and can be offset against future corporate income tax. For each taxable period, taxpayers have the choice to apply this tax credit or not. This is particularly relevant in view of the application of the Global Minimum Taxation rules (GloBE) under Pillar 2 of the OECD BEPS 2.0 actions.

The taxpayer can also claim the benefits of the regime while the patent is still pending approval (subject to recapture should the patent application be denied later).

So-called “historic” R&D costs (i.e., R&D costs stemming from fiscal years preceding the first year of application of the IID) will also have to be deducted but can be spread over a maximum of seven years.

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.

Qualifying companies

• 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.

Development costs can either be deducted immediately as business costs or be recorded as an intangible fixed asset and depreciated over a period of at least three years. Costs of research are immediately expensed.

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 that is higher than the assets’ value.

Qualifying fixed assets

• Patents.
• Fixed assets that promote the R&D of new products and advanced technologies that do not affect the environment, or which 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 which case, the deduction equals 20.5% of the acquisition or investment value (assessment year 2024, 15.5% for assessment year 2025).

The deduction can also be spread over the depreciation period of the fixed asset (this option is not available for patents). In which case, the annual investment deduction will be equal to 27.5% of the depreciation amount (for fixed assets acquired or established during assessment year 2024, 22.5% for assessment year 2025).

As from 1 January 2025, the rate will be fixed at 13.5% (one-off deduction) and 20.5% (spread deduction). The deduction will be renamed the “technology deduction.”

Carry forward to later assessment years

When the deduction cannot be (fully) offset 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 offset 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 offset, 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.

As from assessment year 2025, the repayment period of the research and development (R&D) tax credit will be shortened to four years, due to the introduction of the global minimum tax (Pillar II). The Belgian legislator has implemented this change to make the tax credit for research and development qualify as a Qualified Refundable Tax Credit under the GloBE rules. Under the full GloBE calculations, the tax credit for research and development will thus be treated as income (instead of a tax reduction), resulting in a lower impact on the effective tax rate.

Furthermore, the option was also foreseen to allow taxpayers to freely limit the use of the R&D tax credit for the current year and allow for a carry-over to the following years.

Correction related to the (partial) professional withholding tax exemption regime

When wages that benefit from the (partial) wage withholding tax exemption are included in the acquisition value of assets, the exempt amount may not be included in the calculation basis of the investment deduction / tax credit, which eliminates the possibility of double deduction.

Premiums and capital - or interest - subsidies on tangible and intangible assets granted by Belgian regional institutions to support R&D are exempt from corporate tax.

Belgium offers an efficient, transparent, and flexible advance ruling practice, which provides investors with the necessary legal certainty on how the tax law will be applied to their specific situation or to specific transactions.

R&D tax incentive schemes have been widely adopted in many 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, with some countries offering multiple R&D incentives.

The effectiveness of R&D tax incentives has been the subject of global debate and is well-documented in academic studies and research. Although some early studies challenged the effectiveness of R&D incentives, most studies find that R&D incentives increase private investment and innovation, influence the location where companies conduct R&D and manufacture their products, and lead to several 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.

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, multi-jurisdictional R&D incentives review and analysis. Our professionals think beyond tax and aim to provide our clients with insightful business strategies that support the identification and documentation of R&D activities in real-time, maximizing benefits and driving higher returns on investments.

Deciding where to conduct R&D activities involves many factors, including the availability of the necessary talent and the relative costs of labor, materials, and facilities. R&D incentives and the impact of their costs on other tax positions may also 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 their overall tax posture relative to the business lifecycle.

For additional information regarding these services, do not hesitate to contact us.