Patent income deduction

The Belgian government has introduced a tax deduction for new patent income, amounting to 80% of the income, thereby resulting in effective taxation of the income at the rate of 6.8%. The new tax measure is aimed at encouraging Belgian companies and establishments to play an active role in patent research and development, as well as patent ownership. The tax deduction applies to new patent income and came into force as of tax year 2008, i.e. financial years ending on or after 31 December 2007.

Qualifying patents

The tax deduction for patent income covers:

• patents or extended patent certificates owned by a Belgian company or establishment as a result of its own patent-development activities (partly or fully) in research and development centres in Belgium or abroad
• patents or extended patent certificates acquired by a Belgian company or establishment provided it has further developed the patented products or processes in the company’s research centres in Belgium or abroad

The Belgian company or establishment can use the patents owned by or licensed to it to manufacture patented products or have them manufactured on its behalf. Alternatively, it can license the patents to other parties.

To benefit from the deduction, the research centre should qualify as a 'line of business'. In essence, it should be an entity or a division of an entity that is capable of operating autonomously.

80% tax deduction

For patents licensed by the Belgian company or establishment to any party – related or unrelated – the tax deduction amounts to 80% of the relevant patent income, as long as the income does not exceed an arm's length price.

For patents used by the Belgian company or establishment for the manufacture of patented products – manufactured by itself or by a contract manufacturer on its behalf – the tax deduction is to be 80% of the licence fee that the Belgian company would have received had it licensed the patents used in the manufacturing process to an unrelated party.

Eligible taxpayers

The tax deduction for patent income will be available to all corporate taxpayers in Belgium, in essence all Belgian resident companies and Belgian permanent establishments of non-resident companies.

Additional possibilities to reduce the effective tax rate:

• Apply foreign tax credit if actual foreign royalty withholding tax
• Notional interest deduction