Tax incentives for innovation and R&D – recent developments

Belgium and especially Belgian businesses belong to the top in the EU in respect of spending on research (relative to GDP)^[1]. Governments support businesses with subsidies and tax incentives. While the new Flemish government wants to see spending on research rise further to 5% of GDP, the federal government has recently adjusted the R&D tax incentives so that Belgium remains competitive in the context of international tax developments such as GloBe/Pillar 2.

Companies subject to Belgian corporate income tax can apply a deduction of 85% of innovation income (“innovation income deduction” or IID). This deduction can be carried forward to the extent that taxable profits are insufficient to fully apply the deduction. As from assessment year 2025, even if profits are sufficient, companies can opt not to apply (part of) the deduction. This can be useful for groups falling under Pillar 2 to avoid possible top-up taxes if the minimum tax rate of 15% would not be reached when applying the full deduction. The unused deduction will then be converted into a tax credit (“tax credit for innovation income”).

The legislator wanted to avoid that the effect in respect of the minimum tax is nullified in another way. Therefore, other tax deductions which come after the IID must be calculated as if the IID had been applied (so to avoid that the rate drops below 15% because of those). In addition, companies can also opt not to apply the tax credit. The tax credit is not refundable but can be carried forward indefinitely in time.

As a result, the effective tax rate can be kept above 15%, while at the same time safeguarding the tax advantage related to the innovation income for the future. The introduction of the tax credit for innovation income could thus create opportunities in respect of the application of the minimum tax in Belgium.

Companies could already opt to convert the investment deduction for research and development (R&D) into a tax credit. The law of 19 December 2023 introducing the minimum tax for multinational businesses and large domestic groups has adjusted the tax credit to avoid possible adverse consequences of the minimum tax (see our earlier coverage). First of all, the tax credit will be refundable after 4 instead of 5 years. Secondly, companies can also opt not to apply the tax credit.

In reply to a recent parliamentary question, the Minister of Finance has clarified some aspects in respect of the tax credit for R&D.

• The above changes will only apply to tax credits constituted as from assessment year 2025. Tax credits built up before thus cannot benefit.
• The Minister has also clarified the order in which the tax credit must be applied. First the tax credits carried forward must be used, with the oldest tax credits first, and then the tax credit of the year. As the credit of the year cannot be used before credits carried forward, this could prevent the refund of credits carried forward. Instead, the credit of the year would then be carried forward.
• Any carry-forward of investment deduction for R&D which has earlier been converted into a (non-refundable) tax credit for R&D can be used before the refundable tax credit for R&D.

The Belgian governments are committed to upholding Belgium as an attractive place for doing R&D in an evolving and challenging (tax) environment. An overview of R&D incentives available in Belgium and throughout the world is available on our website. If you have any questions or need assistance in navigating the changes to Belgium’s tax incentives for innovation, do not hesitate to contact your local KPMG advisor.