Brusselloise architecture

The Belgian government has introduced a new regime, referred to as the patent income deduction (PID), which is intended to attract and encourage R&D activities and the ownership of patents in Belgium by allowing companies to deduct 80% of the patent income from their taxable base.

The law of April 27 2007 (published in the Belgian Official Gazette of May 8 2007) introduced a new taxation regime which was designed to attract and encourage R&D activities and the ownership of patents in Belgium.

The new regime, referred to as the patent income deduction (PID), will allow companies to deduct 80% of the patent income from their taxable base. This means that the effective tax rate for income originating from patents will be reduced to maximum 6.8%.

Main concepts of new patent regime

The new tax regime for patent income (entering into force as from assessment year 2008, thus for financial years ending on or after December 31 2007) aims at encouraging Belgian investments in technological innovation generated through R&D activities in relation to the development of patents, the ownership of patents and the receipt of usage rights of patents, as well as the manufacturing of products which are produced based on these patents. In order to achieve such R&D investment growth, the government introduced a tax deduction system for income derived from:

• patents which are licensed by a Belgian company or a Belgian permanent establishment; and

• patents that are used in the manufacturing process of patented products which is carried out by the company or in its name.

The special tax deduction for patent income (PID) is applicable to both Belgian corporations and Belgian permanent establishments of foreign corporations, and is to be applied irrespective of the industry in which the entity is active. Patents used for the provision of services will also benefit from the regime.

Considering that the normal corporate income tax rate in Belgium is 33.99%, the income arising from patents will, considering the 80% deduction provided under the new legislation, only be taxed at a maximum rate of 6.8%. This rate can further be reduced (and will de facto be reduced in the vast majority of cases) by taking into account other deductions (the notional interest deduction). A possible excess deduction for patent income may not be carried forward to future assessment years.

The deduction may be applied to patents acquired through a taxpayer's own R&D centres located in Belgium, as well as patents developed through R&D centres located abroad. When the Belgian company or permanent establishment is acquiring patents which it licensed formerly, the deduction may be applied as well, in so far as the patented products or processes are further developed by R&D centres of the Belgian company, located in Belgium or abroad. It is not necessary that this further development leads to additional patent certificates.

The patent income deduction will apply to fixed (annual or monthly fee, irrespective of volumes produced) or variable (percentage of sales) patent income, as well as to other patent income (milestone payments).

New patent income only

The introduced deduction is applicable only to new patent income, that is income from patents that have not been used by the Belgian company, a licensee or a related enterprise, for the purpose of the supply of goods or services to third parties before January 1 2007.

Development or improvement condition

The deduction provided for patent income from patents or supplementary protection certificates, may be claimed when the patents are developed by a Belgian company or a Belgian permanent establishment, or after acquisition by the latter (through a purchase or contribution) or after licensing to the latter. The patented intellectual property must be improved or further developed by using a research and development (R&D) centre that is located in Belgium or abroad.

In this regard it is irrelevant whether the improvement did lead to an additional patent. However, the law does not provide further guidance as to the substance needed in order to be compliant. It is clear that a Belgian company or permanent establishment acting as a R&D centre and owning the patent may claim the deduction.

Multinational enterprises conducting their R&D operation through a cost sharing or cost contribution arrangement, under which a Belgian participant possesses the legal ownership of the patents, may also apply for the patent income deduction, provided that the patent is exploited by the Belgian company or branch.

In practice, structures often are put in place whereby intangible property centres, owning the intangible property, are located in a low-tax jurisdiction and contract R&D providers are used for performing the majority of the R&D activities. Also in cases where the Belgian company owns the patents that are developed through contract research centres, the PID may be claimed.

On the other hand, a Belgian company or branch that performs only contract R&D activities and as such does not itself exploit the so-developed patents, will not qualify for the PID. The PID will also not be available with regard to income relating to a mere recharge of patent development costs, as also in this case there is no exploitation of the patent itself by the Belgian company or branch.

Anti-abuse provision: avoidance of double dipping

Anti-abuse provisions apply to curtail potential double dipping (double deduction of certain costs). The amount of income from patents acquired by the company must be reduced by:

• compensation due to other parties for obtaining an ownership or licensee right in these patents if such compensation is deducted from the Belgian taxable result during the tax period; and

• amortisations applied to the acquisition or investment value of the patents during the taxable period, to the extent that such amortisation was deducted from the Belgian taxable base.

If the Belgian intangible property centre (company or branch) pays a remuneration for patent R&D activities performed on its behalf by contract developers, either under a contract development agreement or under a cost sharing agreement, such remuneration is not included in the above defined exclusions.

Deduction of all R&D related and other business expenses

The PID is in addition to the normal tax deductibility of all the R&D-related and other business expenses, such as salary costs, R&D infrastructure costs and patent registration duties.

Determination of an arm's length patent income

As stated above, the patent income deduction is applicable to income derived from (1) patents that are licensed by a Belgian company or a Belgian permanent establishment and (2) patents that are used in the manufacturing process of patented products which is done by the company or in its name. As a consequence the PID may be applied to both patent licence income and patent remuneration embedded in the sales price of goods or services.

To the extent that the company licenses the patents, the deduction can be easily calculated based on income (royalties) received. The amount of those royalties will be limited to the amount that is part of the taxable result in Belgium and corresponds to the fee that would have been agreed between unrelated parties. If the company licenses the patents to both group companies and third parties, this third-party price might, under certain circumstances, serve as a basis to determine an arm's length income. If this is not the case, a more in-depth transfer pricing analysis will be required.

The exercise for determining the income derived can be more difficult if the Belgian company uses the patents or extended patent certificates in the production process of patented products. The income is then assumed to be included in the revenues of the Belgian company or permanent establishment. The income derived from the patent equals then the remuneration that the Belgian company or permanent establishment would have received if a licence were granted to an independent party. The appropriate income is the basis for applying the 80% deduction.

Determining the income derived from the patent requires the application of certain transfer pricing methods. Belgian tax law provides for no specific methodologies for valuing intangible assets and determining arm's length royalties. In addition, the tax authorities have not issued useful guidelines in this regard, nor do safe harbours on royalties apply. As a consequence, remunerations determined on the basis of internationally accepted methodologies should, in principle, be acceptable in the eyes of the Belgian tax authorities.

The general guidance set out in the OECD transfer pricing guidelines (OECD guidelines) for applying the arm's length principle pertains equally to the determination of transfer pricing between associated enterprises with regard to intangible property (OECD guidelines, para 6.13). Possible methods for evaluating intangible property include the comparable uncontrolled price (CUP) method (if third-party evidence is available), the application of the transactional net margin method (TNMM) or the profit split method. In practice often a combination of these methods is used.

Other opportunities

When considering the establishment of an intangible property centre for a multinational enterprise in Belgium, in addition to the PID, the benefits and opportunities related to the so-called notional interest deduction obviously cannot be ignored. In so far as patents are transferred to a Belgian company through a capital increase, taxpayers can benefit from an increased basis on which to calculate the notional interest deduction (in addition to the new PID).

As from assessment year 2007 (so as from calendar year 2006 for companies that maintain their books on a calendar year basis), resident and non-resident corporate taxpayers indeed benefit from a deduction for risk capital (or so-called notional interest deduction, NID). This measure is intended to encourage the strengthening of a company's equity capital by narrowing the discrimination between funding with equity capital or with loan capital.

Following the introduction of the NID, all companies subject to resident or non-resident corporate tax in Belgium may deduct a notional or deemed interest from their taxable profits calculated on their adjusted equity capital. The rate of the notional interest deduction will be determined each year and is linked to ten-year government bonds (3.442% for assessment year 2007 and 3.781% for assessment year 2008).

If a company's taxable base is not sufficient to use the entire NID, the balance may be transferred to the next taxable period (up to a maximum of seven years). In support of the introduction of the NID, the 0.5% capital duty on contributions and capital increases has been abolished from January 1 2006. Instead the contribution of capital will only be subject to a lump-sum duty of EUR 25.

Increased equity of a Belgian intangible property centre could, depending on the figures at hand and together with the NID and other incentives (eg the investment deduction for in-house R&D and the foreign tax credit, the latter being limited to the Belgian corporate tax due), significantly decrease the effective corporate tax rate of the Belgian intangible property centre. Taking into account these additional benefits as well as the fact that all R&D-related expenses will, in principle, be fully tax deductible, the effective corporate tax rate on patent income in Belgium will in the vast majority of cases be significantly less than 6.8% and may even end up being as low as 0%.

Although the new tax regime for patent income is applicable only to patents used as from 2007, the new regime has already attracted the attention of a significant number of multinational enterprises and provides a very attractive alternative to the recently introduced Dutch patents box. As the new PID is, in principle, applicable to all Belgian companies and branches in Belgium, and as Belgium does not impose a requirement with regard to the location of the R&D activities, the new Belgian tax regime for patent income is compliant with the rules and initiatives of the European Union with regard to unlawful state aid, the free movement of capital and harmful tax competition.

The government has chosen explicitly to implement a rather straightforward tax incentive, meant to attract and encourage R&D activities and the ownership of patents, through an 80% deduction of patent income. The use of the new tax regime for patent income, together with the NID and other R&D incentives available, makes Belgium a very attractive place for innovative patent-generating companies, intangible property centres and central entrepreneurial entities.

Dirk Van Stappen
		KPMG Tax Advisers CVBA Prins Boudewijnlaan 24 D 2550 Antwerpen (Kontich) Belgium Tel: +32 3 821 19 18 Fax: +32 3 825 38 38 Email: dvanstappen@kpmg.com Website: www.kpmg.be Dirk Van Stappen is a tax partner with KPMG in Belgium. He joined KPMG in 1988 and has over 19 years of experience in advising multinational companies on corporate tax and transfer-pricing issues. Van Stappen heads KPMG's Belgian transfer-pricing practice (a member of KPMG's Global Transfer Pricing Services). He has conducted various transfer-pricing assignments, ranging from preparing European transfer-pricing documentation (including comparables searches), and domestic and international transfer-pricing audit defence and competent authority procedures to negotiating rulings and advance-pricing arrangements (APAs). Another area of focus is strategic transfer-pricing planning , including IP planning and cross-border financing . Van Stappen has also excellent relations with the Belgian tax and APA authorities. Van Stappen is one of the 15 European business experts of the EU Joint Transfer Pricing Forum (JTPF) of the European Commission and participates as a business member to the JTPF since its establishment in 2002. Since 1996, Van Stappen has been a visiting professor at the University of Antwerp in tax management. He is a regular speaker on corporate income tax and transfer-pricing issues. He has written numerous articles in both national and international professional journals.