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.
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Flanders’ innovation income deduction 101
The incentive covers innovation revenues from:
- plant variety rights;
- orphan drugs;
- data and/or market exclusivity;
- copyrighted computer programs (software);
- and more.
In addition, compensations for the breach or transfer of intellectual property rights can now be part of the scope too.
If not used, the innovation income deduction can be transferred to the next accounting years.
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).
What qualifies as innovation income?
- arm’s-length license fees;
- embedded royalties (income included in the sales price of innovations of which your company both owns the IP and manages the commercial activity);
- legal damages received for IP infringements;
- IP income from process innovation;
- capital gains (if they relate to a fixed asset that was created in the previous taxable period or acquired 24 months in advance).
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:
|innovation income deduction =||((qualifying expenditures x 130%)/overall expenditures) x 85% x net qualifying income.|
Note: the fraction above cannot equal a result higher than 1, as the maximum exemption level amounts to 85% of the net innovation income.
Making way for the innovation income deduction, its predecessor – the patent income deduction – was abolished on July 1, 2016. The incentive will, however, remain available for a ‘grandfathering period’ of 5 years.
As such, you may still opt for this earlier deduction scheme for patent income earned up to June 30, 2021. Its scope includes:
- self-developed patents requested before July 1, 2016;
- improved patents and patent licenses acquired prior to July 1, 2016.
Note: if you opt for the patent income deduction, you are not able to apply for the innovation income deduction in relation to the relevant patent for the taxable periods ending before July 1, 2021.