New innovation income system to replace royalty tax-deductible regime in Belgium as of July 2017

The Belgian Government has announced the elimination of its current patent tax-deductible regime by 1 July 2017. The announcement follows the declaration from the Organisation for Economic Cooperation and Development (OECD) that the regime does not meet the requirements set out in its ‘Base Erosion and Profit Shifting plan’, which aims to ensure a regulatory level playing field in patent tax-deductibility regimes across Europe.

Under the current regime in Belgium, which applies amongst others to pharmaceutical patents, 80% of any income out of royalties is tax-free while the remaining 20% is taxable against a tariff of 33.99%, thus leading to an effective royalty taxation rate of 6.80%. To align with the OECD, the Belgian Government is now contemplating an innovation income system. This proposed taxation regime will allow for a higher tax-deductibility rate for income from royalties and broaden its scope of application (for example, to include revenues from orphan drug designations and plant breeders rights). The regime will also impact the pharmaceutical industry, for which patent tax-deductibility is crucial. In this respect, pharma.be, an umbrella organisation for pharmaceutical companies in Belgium, has stated that the new regime will help Belgium remain a key country for commercial scientific research.

Reportedly, the new regime will also encourage Belgian companies to develop innovative software as income from copyright protected software will become tax-deductible.

A prior version of this post was originally published by the same authors in Practical Law – Life Sciences, December 2016 Issue (Thomson Reuters).