TAX INCENTIVES FOR R&D IN BELGIUM
Over 170 biotech companies operate in Belgium, generating more than 16% of the European turnover in the sector, making Belgium one of the most important countries for R&D in the European Union. Belgium has taken several measures to promote investments in Belgium and to create a favourable environment for R&D activities. For the 2008 tax year, a new tax incentive for patents has been introduced which leads to a maximum effective tax rate of 6.8% on patent income. The newly adopted Patent Income Deduction (PID) results in the lowest effective European tax rate on income derived from the licensing of patents or the use of patented products, making Belgium a highly favoured location for foreign investment.
The PID allows Belgian companies as well as Belgian branches of foreign companies to deduct from their Belgian taxable basis 80% of the royalties received from patents resulting from R&D activities. This is intended to encourage all R&D activities in relation to the development or improvement of patents. The main characteristics of the PID and other R&D tax incentives are as follows.
PATENT INCOME DEDUCTION
The PID is available to all corporate taxpayers in Belgium, in essence all Belgian resident companies and Belgian permanent establishments of non-resident companies. No tax ruling is necessary and the PID applies automatically. The compliance formalities are minor and consist of fulfilling a specific form enclosed with the tax return.
The PID only covers patents and supplementary protection certificates, but not any other intellectual property rights. The company must hold a patent right; the PID does not apply before the grant of the patent and is no longer available after the patent's expiry. The patent may be (i) self-developed or (ii) acquired and further developed.
Self-developed: the patent is totally or partially developed in its research centre(s) in Belgium or abroad.
Acquired and further developed: the company either acquires the patent from or is granted a licence to the patent by a third party, provided the company further develops the patent in the company's research centre(s) in Belgium or abroad. However, it is not required that the further development results in an additional patent.
The research centre that developed or improved the patent must constitute a branch of activity of the company, i.e. a division of an enterprise that constitutes an independent business unit, and can be located in Belgium or abroad.
The PID is not restricted to Belgian patents but extends to patents valid in other jurisdictions (e.g. U.S., Japanese or German patents). Also, the company does not need to be the sole and full owner of the patent rights -- it can hold a patent together with other companies and the patent can be held on the basis of other property rights, such as usufruct rights.
For the PID to apply, it is essential that the patent has not been commercialized anywhere in the world before 1 January 2007.
The patent can be licensed to one or more third parties or can be used in the manufacturing process by or on behalf of the company.
If the patent is licensed, the income consists of licence payments such as royalties, milestone payments and upfront fees. When the parties are related, the royalties must comply with the arm's length principle in order to avoid abuse. To the extent that the remuneration also relates to non-patent intellectual property, only the portion that relates to patents qualifies for the PID.
If the patent is used in the manufacturing process by or on behalf of the company, it is important to determine how much of the turnover income can qualify for the PID. This will typically be calculated as that portion of the derived income that the company would have received for licensing the patent to an unrelated third party in an arm's-length transaction.
In order to avoid abuse and double deductions, remuneration paid to third parties on acquired patents and the deprecation on these patents must be deducted from the basis of the PID if these costs are already deducted from the taxable result in Belgium. This anti-abuse provision is not applicable to self-developed patents. The R&D expenses associated with self-developed patents should not therefore be deducted from the basis for the PID.
The Belgian PID is not capped.
OTHER TAX INCENTIVES
The PID can be claimed in addition to other already existing tax incentives, such as:
Notional interest deduction
Together with the PID, Belgian resident companies as well as permanent establishments of foreign companies paying taxes in Belgium, can benefit from the Notional Interest Deduction. The deduction equals a percentage fixed on a yearly basis (e.g. 4.307% for tax year 2009) of the equity shown in the balance sheet of the annual account.
Investment deduction and R&D tax credit
Investments in patents and fixed assets used in Belgium to promote R&D are eligible for an increased investment deduction of either 13.5% on the acquisition value or 20.5% of annual depreciations permitted for tax purposes
As an alternative to the investment deduction, a R&D tax credit is granted on qualifying R&D-related investments. The taxpayer must opt for one of the two methods (Investment deduction or R&D tax credit).
Partial payroll withholding tax exemptions
Companies active in R&D can benefit an exemption from payroll withholding tax for researchers (PhD, engineers and master degrees). Recently, the maximum exemption has been increased from 50% to 65%.