Scope extended to plant variety rights and protected innovative software
The IPD applies on profits arising from the exploitation of the following intellectual property rights:
Patents and additional protection certificates;
Plant variety rights applied for after 1 July 2016 or acquired after 30 June 2016;
Orphan medicinal products (limited to the first 10 year period after registration) applied for or acquired after 1 July 2016;
Data or market exclusivity rights granted by a competent authority on crop protection chemicals protected under the applicable EU law (or similar rules of national or international law) during the first 10 years of protection;
Copyright-protected software, providing that such software is created in the context of an R&D project or programme.
The company applying for the deduction must be the full owner, co-owner, usufructuary, licensee or rights owner (“rechtenhouder”).
Compared to the previous patent income deduction, the IPD’s scope has been substantially extended.
Profit from intellectual property rights
The new deduction applies to royalty income or “deemed royalties”, i.e. royalties that a company must pay under ‘arm’s length’ conditions for the use of the protected technology, rights or software.
It has now been clarified that the new deduction also applies to process patents, indemnities and capital gains. For capital gains to qualify, the following special conditions apply:
the intellectual property right must have been created during the previous tax year or, in the case of an acquired right, the acquisition must have taken place in the previous 24 months;
the deduction only applies if the realised capital gain is reinvested within 5 years (or before the professional activities stop) in R&D projects that have the objective of obtaining other intellectual property rights.
Calculation of net profits
The IPD is calculated on the net profit generated by the qualifying intellectual property rights. The calculation is made for each single right as follows:
gross revenue is all revenue (e.g. royalty fees or deemed royalties included in the price charged for products) received in consideration for the use of the rights;
net profits equal gross revenue reduced by the following amounts:
expenses for R&D directly related to qualifying intellectual property rights. Overhead expenses (expenses not directly linked to the R&D activities) and costs relating to buildings or financing do not have to be deducted;
costs for the acquisition of intellectual property rights;
fees paid to other parties (related or unrelated) in consideration for the R&D services.
It often happens that, shortly after the completion of R&D, expenses relating to R&D exceed the generated revenues. In such a case, the excess balance must be carried forward to future tax years. A company can also opt to depreciate the R&D expense (for the purpose of applying the IPD) over a maximum period of 7 years. Specific “recapture” rules apply in case the intellectual property rights are transferred and/or if the company no longer applies the IPD during the depreciation period.
Limitation to qualifying profit for own R&D efforts
Following the OECD’s recommendation (the “modified nexus approach”), the IPD only applies to the extent that the taxpayer demonstrates that the qualifying intellectual property right is the result of its own R&D efforts or R&D work performed by unrelated parties (e.g. universities, independent research offices, etc.). Qualifying profit will be reduced to the extent that R&D work is outsourced to related entities or that qualifying rights are acquired.
The following formula will be used to calculate qualifying profits:
( A + B ) x 1.3
A + B + C + D
“A” means the direct expenses for the taxpayer’s own R&D efforts. “B” means the expenses for R&D work outsourced to unrelated parties (or to related parties recharging such expenses without mark-up). “C” is the amount of expenses for R&D work outsourced to related parties. “D” means the expenses for the acquisition of intellectual property rights.
The numerator is then increased by 30% (however, the result of the fraction is capped at 1). The new IPD will apply to the maximum extent if a company is performing all R&D work itself (or is only subcontracting R&D work to unrelated parties). The IPD will be reduced to the extent that more R&D activities are outsourced to related entities and/or such rights have been acquired.
If, despite the fact that a corporate taxpayer is undertaking substantial R&D activities, the fraction results in a low deduction, then there is the option of applying for a specific ruling allowing a higher IPD. Since these rulings must be shared with other EU members states and the EU Commission, we expect that this exception will only be granted in very exceptional circumstances.
85% deduction that can be carried forward
The IPD then equals 85% of the qualifying profit. The Belgian government can change the percentage of this deduction without any parliamentary intervention being required. It is expected that the amount of the deduction may be adjusted upwards.
Unclaimed IPD (e.g. the in absence of sufficient taxable income) can be carried forward for an unlimited period of time.
An IPD claim pending the application for an intellectual property right
The IPD can already be claimed pending the decision about whether or not the intellectual property right will be granted. From a technical tax perspective, such a conditional exemption constitutes a “tax exempt reserve” in a corporate income tax return. This reserve is tax-exempt if the right is finally granted. In case the application for the right is no longer pending or if the right were not granted, then the exempted reserve will be subject to corporate income tax.
Special documentation requirements
The IPD must be claimed by using a specific tax form to be filed together with the corporate income tax return.
Taxpayers must document all the elements used for the IPD’s calculation (e.g. the amount of gross revenue, the nature of R&D expenses for each IP right, etc.). The documentation file should include:
the real (market) value of intellectual property rights acquired from a related entity;
the calculation of gross revenue;
the calculation of net profit;
the calculation of the fraction for qualifying profits.
If it is not possible to make all the calculations for each single intellectual property right, then calculations may be aggregated by product/service based on a set of intellectual property rights.
Application for SMEs
As opposed to the patent income deduction, the IPD no longer contains specific exemptions for SMEs. Their absence should not hinder these organisations benefiting from the IPD. Our office has extensive experience in assisting SMEs in these matters and will make available a documentation set that allows also innovative small companies to claim IPD on the profits generated by their R&D work.
For more information: