New tax relief for software development!
The Government wants to make Belgium a hub for the development of intellectual property rights such as patents, plant varieties, orphan drugs or computer programmes.
Combined with the attractive copyright tax regime which developers of computer programmes benefit from, the new tax deduction for innovation should promote the creation in Belgium of computer programmes with high added value. However, the deduction is not open to income from all computer programmes. The programme must be protected by copyright – namely be original and formatted – and be the result of a project or a programme that is for the purpose of fundamental research, industrial research or experimental development. Additionally, the programme in question cannot have generated income before 1st July 2016. The deduction will also be applicable to derivative creations or adaptations of existing computer software.
Different stages in the development of software can be part of an R&D project or programme. As an example, searching for new methods of calculation may constitute an activity of fundamental research. Development of a new programming language, new operating systems or programme generators falls under industrial research. The development of new software applications and enhancement of application programmes may constitute activities of experimental development.
The deduction for innovation will allow companies to deduct 85% of their innovation income from their taxable profits. This innovation income corresponds to the part of net income which relates exclusively to the operation of a computer programme resulting from a research and development project or programme.
The following will be taken into consideration as innovation income, insofar as it is entered into the taxable result in Belgium: royalties from licences, compensation owed to the company due to copyright infringements relating to the programme as well as the amounts obtained on the occasion of the alienation of copyright in the cases where it has the nature of a capital asset. In order to apply the deduction, the company may also take into account royalties that it would have received if the goods produced or services rendered by it were produced or provided by a third party under a license granted by the company.
In accordance with the guidelines of the BEPS (Base Erosion and Profit Shifting) plan of action adopted by the OECD, the deduction will nevertheless be limited, by applying a “nexus” fraction, on a pro rata basis of developments carried out by the company itself.
The fraction is composed of:
- for the numerator: qualifying expenditures, namely research and development expenses in order to obtain the computer programme that the company has carried out itself or has paid to a non-related company; and,
- for the denominator: all of the research and development expenses. This fraction must be updated each year by adding the expenditure incurred over the course of the fiscal period.
It should be noted that qualifying expenses may be increased by 30% up to a maximum of the figure of the denominator in order not to penalise a company which has recourse to sub-contracting with a related company or which improves upon a computer programme that it has acquired.
Finally, in the case of an exclusively fiscal operation, the application of the deduction will require significant administrative steps. The taxpayer will have to make available to the tax administration documentary evidence that can establish, in particular, the innovation income that relates to the computer programme developed by the company, the charges that are deducted from innovation income to determine the net amount, the qualifying expenditures and the overall expenditure. The taxpayer must also attach to its tax returns a statement whose template will be set by the Minister of Finance.
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