The general principle behind the innovation income deduction? Up to 85% of a Flanders-based company’s net earnings resulting from innovation is exempt from corporate taxation – resulting in a significantly lower effective tax rate.

Apart from the innovation income deduction, there are a number of other incentives that make Flanders stand out as a leading R&D hub within Europe. These include:

• the R&D payroll tax incentive – companies in Flanders can recover up to 80% of the withholding tax paid on professional income for academic staff and researchers, and also for R&D staff with bachelor’s degrees from 2020 on.
• the tax credit for R&D investments – 13.5% of the investment value (at once) or 20.5% of the annual depreciation (staggered).

The innovation income deduction applies to net income: the gross IP income minus current-year expenditures for the development of the IP asset. The following elements are included in those expenditures and should be derived from the gross income:

• expenditures for the acquisition of IP rights;
• related R&D expenses;
• expenditures for R&D outsourcing to related or unrelated parties;
• prior-year expenditures incurred in financial years ending after June 30, 2016 – you may, however, choose to spread the recapture of these expenses over a maximum of 7 years.

Once the net income is determined, the following formula is used to calculate the innovation income deduction:

Note: the fraction above cannot equal a result higher than 1, as the maximum exemption level amounts to 85% of the net innovation income.