End of the Patent Income Deduction

Practical Considerations on the end of The Patent Income Deduction

The next corporate income tax return (assessment year 2022), will be the last one in which the patent income deduction can be applied. This return will be accompanied by the unique situation in which the patent income deduction and the innovation income deduction can be applied for the same patent in one financial year. Although the regimes are similar, the differences provide important points of attention.

The New Regime

As of the 1^st of July 2016, the patent income deduction was replaced by a new regime, the innovation income deduction. Whit the introduction of the innovation income deduction a transitional period was provided for income obtained between the 1^st of July 2016 and 30^th of June 2021.

The new regime has a broader scope, but brings with it a great deal of additional complexity. In addition to patents, income from innovative software or certain bio-tech product will also be eligible. On the other hand, the benefit is no longer determined in function of the turnover generated by a patented invention, but on the basis of the profit that can be attributed to the innovative nature of this invention (this is the so-called net innovation income).

Risks

For companies that made use of the patent income deduction, a thorough analysis will be necessary in the next corporate tax return. After all, the patent income deduction will have to be converted to the new regime.

In addition to the income related to the invention, all costs related to the development, maintenance and commercialization of the invention must now also be identified.Careful consideration of these costs will be required to correctly determine the part of the profit associated to the innovative nature of the invention.
Moreover, the administration has published many Preliminary Decisions or Rulings in the past five years. In such Rulings, the administration has given concrete interpretations to specific questions on the relevant articles of law. In this way. many ambiguities have been cleared up.

The new regime, in combination with the established ruling practice, means the rules concerning the patent and innovation income deduction are now more strictly defined. To avoid unpleasant surprises, it is advisable for taxpayers who have been applying one of these deductions for a long time to regularly check their process against these changes. The end of the transitional regime is the ideal moment for such an exercise

Opportunities

The transitional regime also offers opportunities. For certain income obtained during the transitional period, taxpayers can choose between the application of the patent income deduction and the innovation income deduction.

For patents filed before the 1^st of July 2016, and for which this choice has not yet been made, this choice still exists! However, the application of the patent income deduction in the corporate income tax return for assessment year 2022 is the last chance to enjoy the associated benefits.

Each application of the patent income deduction prior to the application of the innovation deduction, however limited the revenues, will have a positive impact on the savings to be realized. After all, on first application of the innovation income deduction, all R&D costs since fiscal year 2016 should be deducted. When applying the patent income deduction, these costs do not have to be deducted. The administration has already confirmed several times that these so-called historic costs do not have a negative impact on the savings realized when using the patent income deduction before switching to the innovation income deduction.

Conclusion

Income received during the first half of 2021, related to patents filed before the 1^st of July 2016, can still enjoy the benefits of the transitional regime.

A one-off application of the patent income deduction in the corporate income tax return for the assessment year 2022 can, even in the case of limited income, can yield a long-term and more interesting saving thanks to the benefits of this transitional regime.