11 June 2024

Innovation deduction: how does it work?

by Sven Loosvelt and Siel Demeyer

Companies that invest in innovation can benefit from several tax incentives. For instance, companies with certain intellectual property rights can take advantage of the innovation deduction. This deduction is calculated based on the income generated from these intellectual property rights.

Which intellectual property rights are eligible?

The innovation deduction applies to income from:

  • Patents;

  • Supplementary protection certificates;

  • Computer programs (software);

  • Plant breeder’s rights;

  • Orphan drugs;

  • Government-granted data or market exclusivity.

In practice, the most common intellectual property rights are patents and computer programs (software). A patent protects a technical invention, which must be new, inventive and industrially applicable.

Interestingly, software that is only used within a company (and therefore not commercialised) also qualifies. Both owners and users (usufructuaries, licensees) can benefit from this measure.

However, trademarks and other marketing-related intellectual property rights, such as trade names or domain names, are excluded from the scope of the innovation deduction.

What does the scheme entail?

Thanks to the innovation deduction, a company can deduct 85% of the net innovation income from the taxable base in corporate income tax. The qualifying income includes license fees, royalties, income from the sale of intellectual property rights, and damages received. These incomes must be reduced by the related R&D expenditures of the year in which the income was realized, as well as the historical R&D expenditures related to the intellectual property right. However, historical costs can be spread over a period of up to seven tax years.

The deduction is further limited to the proportion of qualifying R&D expenditures (increased by 30%) in the total R&D expenditures related to the intellectual property right. Qualifying R&D activities are activities that are carried out by the company itself or outsourced to independent third parties, such as external laboratories or universities. Expenditures for R&D activities outsourced to affiliated companies or for the acquisition of intellectual property rights are non-qualifying R&D expenditures.

It is therefore very important that R&D activities and intellectual property rights are properly structured within the group in order to optimise the application of the innovation deduction.

Documentation requirement

Companies wishing to avail of the innovation deduction must comply with extensive documentation requirements. For each intellectual property right, the company must keep available evidence regarding the actual value of the intellectual property rights acquired, the amount of net and gross innovation income and the calculation of qualifying and global expenditure.

At Vandelanotte, we are ready to help you prepare the necessary documentation for the innovation deduction. Contact your account manager or one of our specialists using the form below.

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