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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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