The Belgian government has approved a draft law introducing a deduction for innovation income. The text has been sent to the Council of State for advice (subject to change).

The new regime will replace the patent income deduction which has been abolished earlier (but with a grandfathering period until 30 June 2021) as it was not in line with the OECD ‘modified nexus approach’. It will enter into force retroactively as from 1 July 2016.

 

The main features of the new regime are:

• The deduction equals 85% of net income from qualifying intellectual property.
• The deduction applies to income from patents or supplementary protection certificates, breeders’ rights, orphan drugs, data and market exclusivity and copyrighted software. Capital gains on such IP also qualify if reinvested.
• The net income is determined based on the ‘modified nexus approach’. According to the ‘modified nexus approach’, there should be sufficient substance and an essential link between the expenses, the patents and the related patent income. This is expressed in the following formula: 

[qualifying R&D costs/total R&D costs] x total income from intellectual property  

= qualifying income from intellectual property

For the qualifying costs, the cost of outsourcing to related parties are excluded, contrary to the cost of outsourcing to unrelated parties which qualifies as ‘qualifying costs’. An up-lift of 30% of qualifying costs is provided.

• Introduction of a ‘tracking system’ whereby taxpayers must closely monitor the expenses, patents and income.
• The unused deduction can be carried forward.
• The taxpayer can claim an exemption as long as the patent is still pending.