Patent income deduction: end of the transitory regime on June 30th, 2021!

February 11, 2021

Consulting , Innovation Income Deduction , Patent Income Deduction

Under the impetus of the OECD and its BEPS plan (Base Erosion and Profit Shifting), the Belgian legislator had to abolish the patent income deduction (PID) tax regime by 1st of July 2016. The old tax regime was replaced by a new regime called the innovation income deduction (IID).

As a way to ensure a smooth transition, the Belgian legislator introduced a transitory regime, which allowed companies a choice. Either they applied IID straight away, or they could continue applying PID until June 30th, 2021.

With the deadline approaching rapidly, we want to inform our clients on what their options are.

Companies with an accounting period (AP) ending after June 30th, 2021, will exceptionally have the possibly to apply both PID and IID. In such case, the old PID regime applies to the income relative to the period prior to June 30th, 2021, and the income relative to the period after said date will be governed by the new IID regime.

Although the new IID regime has some distinct advantages compare to the old regime, i.e. the increased deduction rate of 85% or the right to carry-forward deduction excesses without any limit in time[1], it also has some more restrictive features. One of these more restrictive attributes is the fact that the tax deduction is applied on the net innovation income, which can lead to a lower tax saving comrade to the old regime. Another important new trait of the current tax regime is the so called “Nexus ratio” that applies to the net innovation income. The Nexus ratio was introduced to ensure that, in order for a significant proportion of the innovation income to qualify for IID, a significant proportion of the actual R&D activities must have been undertaken by the company itself.

These new restrictive features of the IID tax regime have put an administrative burden on companies. Companies that want to benefit from the deduction are bound by certain special reporting obligations[2] so as to justify their use of this tax deduction.

Looking at the new regime’s complexity, our experts can help you verify whether or not your company qualifies, and what the potential tax savings would be. Leyton’s experts will happily guide your company through all legal requirements to ensure a maximized and safe application of the deduction.

[1] Other notable advantages are the extended scope of application with regard to the type of income that qualifies for the deduction; the right to spread initial R&D expenditures over a seven-year period. 

[2] Justified by the exigence of transparency of BEPS. In order to benefit from the deduction, a company will have to give details about qualifying and non-qualifying expenses.