Effective 1 July 2016, the intellectual property (IP) regime (also known as Patent Box Regime) regime was abolished as it did not comply with the ‘modified nexus’ approach developed as part of OECD BEPS Action Point 5. The regime has been replaced with a new IP regime. However, the old regime has been grandfathered through 30 June 2021, subject to certain conditions. The old regime provided for 80% deduction of income derived by resident companies and Belgian PEs of non-resident companies from patents licensed to a related or unrelated party.
Under the new regime, resident companies and Belgium PEs of non-resident companies are eligible for a deduction of 85% of the net qualifying IP/ innovation income derived from qualifying IP assets. Principally, benefits under the new IP regime are available, if there is a nexus between the expenditure incurred and the activities of the taxpayer for IP development.
For determining the innovation deduction amount, the nexus ratio is calculated as:
Qualifying R&D expenditure x 130% (i.e. a 30% uplift in the expenditure incurred) / Total R&D Expenditure.
The nexus ratio must not exceed 100%. The nexus ratio is then applied to the total qualifying income and thereafter multiplied by 85% to determine the deduction amount. If the deduction amount cannot be fully utilized, it can be carried forward indefinitely.
The deduction under the new regime is subject to the following documentation requirements to be followed by the taxpayers:
- details of expenses incurred in relation to IP right reflecting that the IP right acquired from the related party is at the market price;
- details of allocation of innovation income by the taxpayers according to specified categories including license fees, indemnity payments, and gains from disposal of IP rights;
- documentation to substantiate that claim for deduction of innovation income is not received prior to 1 July 2016;
- documentation to substantiate that no duplicate claims are made;
- in case of intellectual property rights that were jointly developed with other taxpayers, documentation detailing the contribution of the taxpayer in the overall development cost;
- details related to the deduction such as -
- methods used for determination of the gross amount of innovation income,
- determination of indemnity payments not yet determined in relation to judicial or arbitral decision or amicable agreement or insurance contract,
- determination of R&D costs,
- sub-division of expenditure into expenditure for own R&D activities, expenditure of R&D sourced to unrelated parties and related parties, and expenditure for acquisition of IP rights for determining the nexus ratio.
For the purposes of the above documentation requirements, it is clarified that in determining whether expenses are directly related to innovation income, it will be sufficient to consider the actual use of it rather than its nature.