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News

Tax Deduction for Patent Income

Date: 20 May 2007

By Act of 27 April 2007, Belgium has introduced a new tax regime to encourage technological innovation and to promote the development of patents in Belgium. The deduction is a deduction of 80% of qualifying patent income, resulting in an effective tax rate on royalties of 6.8% instead of the standard corporate income tax rate of 33.99%.

The Tax Deduction for Patent Income is granted for royalties from “new” patents or extended patent certificates held by a corporate taxpayer that have been (partially or fully) developed by the enterprise in its R&D center. New patents are patents that have not been used by the enterprise, by a licensee or a related enterprise, for sales of goods or services to third parties before 1 January 2007. Moreover, the R&D center must not be located in Belgium.

The tax deduction is 80 % of the royalties received from patents licensed to any third party or to a related party (but in that case the income is limited to an at arm's-length income). The taxpayer can also use the patents for manufacturing (even through a contract manufacturer) and in that case, the qualifying patent income is the theoretical licence fee that the enterprise would have received if it had licensed the patents used in the manufacturing process to an unrelated party.

If the income includes any income other than patent income, the income attributable to the patents must be separated to calculate the tax deduction.

The tax regime can also be used for patent that are acquired (through a purchase or a licensing agreement) if the enterprise has developed products or processes in its R&D center. It is not required that additional patent certificates are taken out for these further developments. To avoid a double deduction of costs relating to the acquisition or licensing of patents, the taxpayer will have to disallow certain expenses. These include any compensation due to third parties for the ownership or the license in the patents and the depreciation of the acquisition or investment value of the patents. The fee or acquisition or investment value paid by the Belgian company must be an arm’s-length amount. Otherwise, the basis for the 80% deduction will be reduced by the arm’s-length consideration.

Income received by a Belgian developer for R&D under contract development or cost sharing agreements does not qualify for the patent income deduction and any contributions to third parties for R&D carried out by those third parties does not need to be taken into account for correction.

This tax regime for patent income makes Belgium one of the most tax-friendly countries for intellectual property. The tax regime was aimed at the pharmaceutical industry, but it can benefit any other company that owns intellectual property through patents.

 

 

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