Belgian innovation deduction

The Frequently Asked Questions (FAQ) on the Belgian innovation deduction were issued in 2018 (previous tax alert) and were recently updated. The innovation deduction provides for a deduction of 85% of the net income from intellectual property (IP). This results in an effective tax rate of 4.4% (2018 and 2019) and 3.8% (as from 2020) on the net income.

The updated FAQ clarify that the IP should not be recorded as an asset on the balance sheet in order to qualify for the innovation deduction. The FAQ expressly state that “the question whether the IP is recorded as an asset on the balance sheet does not impact the acquisition of the tax benefit of the innovation deduction” (FAQ nr. 13).

However, in order to apply the innovation deduction to capital gains, the FAQ specify that the IP should be recorded as an asset. If the IP is not recorded, the taxpayer will not be entitled to the innovation deduction in respect of capital gains on the IP (FAQ nr. 14). This requirement does not apply to the other categories of innovation income. Therefore, license income and IP remuneration included in the sales price of IP protected products or services will qualify for the innovation deduction, even if the IP is not recorded as an asset.

Taxpayers may request tax rulings in order to obtain legal certainty regarding the conditions and the calculation of the innovation deduction. The 2018 annual report of the ruling commission shows a sharp increase in the number of files in relation to the innovation deduction (103 ruling requests and 129 cases in pre-filing phase in 2018 vs. 48 ruling requests and 112 cases in pre-filing phase in 2017).

Note that there’s also an increasing number of tax audits which are specifically aimed at the application of the innovation deduction. Therefore, taxpayers are recommended to monitor the correct application of the tax ruling or, in the absence of a tax ruling, to properly document the application of the innovation deduction.