Human Capital Alert
New rules for the partial exemption of withholding tax for research and development activities
The Belgian government has decided to increase the partial exemption from withholding tax for qualified researchers working in research and development activities from 75% to 80%. The new 80% exemption rate takes effect from 1 July 2013. This means that employers will only be obliged to remit 20% of the total withholding tax from qualified researchers and may retain the remaining 80% for company use.
The government is also introducing statutory definitions of the activities that qualify for this exemption. Programmes seeking to make use of the exemption are required to register with the Belgium Federal Science Department.
The Belgian parliament has voted on a number of recovery measures, with the aim of maintaining the spending power of the population and making the country more attractive as a corporate investment destination. To support this, a number of corporate tax incentives have recently been introduced or improved.
This alert highlights the key points regarding one of these changes which applies to qualified researchers involved in research and development activities.
Increase in exemption from withholding tax for researchers
The Belgian government has decided to increase the partial exemption from withholding tax for qualified researchers working in research and development activities, from 75% to 80%.
The 80% exemption rate takes effect from 1 July 2013. From this date, employers will continue to retain the standard withholding tax on qualified researchers’ compensation, but they will only be obliged to remit 20% of the tax retained to the government.
“Research and development” will be defined in the Belgian tax law
To date, there has been no clear definition of the qualifying research and development activities in the legislation. EY has proactively engaged the Belgian tax administration to define the research projects or programmes and the related definitions of “research” and “development” that apply to this exemption.
From 1 January 2014, this will be defined. The definition will distinguish between the following three relevant activities:
- “Fundamental research” means experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundations of phenomenal and observable facts, without any direct application or use when the search is conducted.
- “Industrial research” means research or critical investigation aiming at the acquisition of new knowledge and skills for developing new products, processes or services or for bringing about a significant improvement in existing products, processes or services. It includes the creation of components for complex systems, which is necessary for the industrial research and notably for generic technology validation, with the exclusion of prototypes.
- “Experimental development” means acquiring, combining, shaping and using existing scientific, technological, business and other relevant knowledge and skills for the purpose of producing plans and arrangements or designs for new, altered or improved products, processes or services. These may also include, for instance, other activities aiming at the conceptual definition, planning and documentation of new products, processes or services. Those activities may include producing drafts, drawings, plans and other documentation, provided that they are not intended for commercial use.
The development of commercially usable prototypes and pilot projects is also included where the prototype is necessary to the final commercial products and is too expensive to be used only for demonstration and validation purposes.
The experimental production and testing of products, processes and services shall also be eligible, provided that they cannot be used directly or after being transformed in industrial applications for commercial purposes.
Experimental development shall not include routine or periodic changes made to products, production lines, manufacturing processes, existing services and other operations in progress, even if such changes may represent improvements.
These definitions are slightly different from the practical interpretation which has been applied to date. In addition, the law confirms that the exemption of withholding tax can be applied to “research” or “development” activities and it is not necessary that both definitions are met for an activity to qualify.
The definitions outlined above will come into force as from 1 January 2014. Prior to this date, employers need to determine bona fide what does and does not qualify as R&D for withholding tax purposes. However, the risk is that the scope applied by an employer could subsequently be challenged by the Belgian tax authorities. Alternatively, a pre-validation can be applied and obtained from the Belgian tax administration.
Upfront registration required
The projects or programmes qualified as “research or development” activities are only eligible for the partial exemption if they are registered with the Belgian Federal Science Department. The following details are required for registration:
- The identification documentation of the company or employer.
- A description of the project or programme, which should confirm the “fundamental”, “industrial” or “experimental” elements of the activities.
- The start date and the anticipated completion date of the project or programme.
Upfront registration will become mandatory from 1 January 2014.
Transition period for existing projects or programmes
Existing projects or programmes, which currently qualify for the exemption of withholding tax, are required to comply with the new definitions and apply the registration procedure from 1 January 2015.
Validation procedure – optional
A company or employer may request upfront advice from the Belgian Federal Science Department on whether the basic conditions are met for the research projects or programmes, although this is not compulsory. The two basic conditions are:
- The employees carrying out the project should have a qualifying degree.
- The definitions for research and development are met.
In the event that a request for approval is rejected, the company is required to immediately repay the amount of withholding taxes that had been exempted.
Employers who are currently eligible for the partial exemption of withholding tax should review their positions to ensure that they can continue to use the exemption. Employers should also consider reviewing the status of their qualifying employees to confirm whether their activities qualify under the new legislation. Employers should prepare their internal procedures to comply with the updated legislation.