Innovation income deduction replaces the patent income deduction
October 2021 – The tax incentive for the acquisition and use of patents - the patent income deduction - was particularly attractive. Perhaps even too interesting, as Europe called for its abolition in 2016. Belgium replaced the patent income deduction with the innovation income deduction. The transitional regime for the patent income deduction ended on 30 June this year. This is an opportunity to remind you once again of the rules relating to the deduction for innovation income.
2016
The innovation income deduction was introduced in 2016 and replaces the patent income deduction since 1 July 2016. The patent income deduction was mainly related to patent income. The innovation income deduction is a tax exemption for income from intellectual property rights, which are more extensive than patents.
The following are eligible for the innovation income deduction
process innovation ;
plant breeders' rights and orphan drugs;
computer programs protected by copyright, including any derivative or adaptation from an existing computer program;
data exclusivity or market exclusivity granted by public authorities;
patents and supplementary protection certificates (SPCs).
The company must be a full owner, co-owner, usufructuary, licensee or rights holder.
The income may be called royalties, fixed royalties, conditional royalties, etc.
The deduction for innovation income also applies to damages for infringement of intellectual property rights, and even to the proceeds of their disposal.
The deduction for innovation income is also possible if the company itself uses the intellectual property right. In this case, the tax authorities base themselves on the hypothetical licence fee that the company would have received if it had granted the licence to a third party.
Calculation
The exemption is calculated according to the following formula:
"Net innovation income x 85% x nexus fraction".
This formula consists of three elements:
Net income: the income from intellectual property rights, as listed above, must be reduced by the related costs. We are thinking here of salary costs for scientists, but also of depreciation. This is an important difference with the previous deduction for patent income.
85%: an exempt portion of 85% is calculated on the balance. Under the patent income deduction, this exemption was only 80%.
Nexus fraction: the nexus fraction ensures that the deduction for innovation income is only applied to income that is directly derived from patents for which the actual research and development activities were carried out by the company itself.
The numerator of the fraction contains the expenses for the R&D activities that the company carried out itself or subcontracted to unrelated companies. The denominator shows the same expenditure plus payments to affiliated companies and expenditure on the acquisition of intellectual property.
The amount in the numerator may be increased by 30% if the reporting company relies on an acquired intellectual property right or subcontracts these R&D activities to related companies.
Terms and conditions
Like several other corporate tax exemptions and deductions, the deduction for innovation income is not possible for abnormal or gratuitous benefits received, secret commissions granted, in case of non-compliance with the investment obligation and the condition of intangibility of the investment reserve...
If the company has not made sufficient profits, it can carry forward the unused exemption to subsequent taxable periods. But there are limits to the amount that can be used as a deduction for deferred innovation income. And in case of a transfer of the company (change of control), the deduction for deferred innovation income is lost.
Ruling Commission
It seems appropriate to submit the files concerning the deduction for innovation income to the Ruling Commission in advance. This is not compulsory, but it makes things much easier, for example in the event of an audit. The Ruling Commission has meanwhile gained a lot of experience with this type of application, as the innovation income deduction seems to be a very popular investment incentive.
