Proposed new rules for the partial exemption of withholding tax
The Belgian government has announced 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 these plans a number of specific tax incentives for companies have been introduced or improved.
This alert highlights the key points regarding one of these proposed changes which applies to qualified researchers involved in Research & 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%, irrespective of the category of employer (universities, innovative start-up companies and companies employing individuals with a PhD/Masters). Please see previous alerts on this topic.
The 80% partial exemption will come into force from 1 January 2013.
“Research and development” now defined in the Belgian tax law
At present, there is no clear definition of the type of R&D activities that qualify for the partial exemption from withholding tax. Ernst & Young has been working with the Belgian tax administration to define the research programs and the related definitions of “research” and “development” that apply for this exemption. The summary of this definition will be included in article 275(3) of the Belgian Income Tax Code and is expected to read as follows:
“§3. “Research projects” or “research and development programs” are projects or programs that aim for:
- Either research; which is defined as the original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding;
- Either development; which is the use of information acquired by examination or by other means, leading to a plan or design for the production of new or considerably improved materials, devices, products, processes, systems or services, prior to the commencement of commercial production or use.”
This definition does not differ from the practical interpretation which has been applied to date. In addition, the proposed law confirms that the exemption of withholding tax can be applied to “research” or “development” activities – it is not necessary that the definition of both is met.
Upfront filing request and approval required
The projects or programs described above are only eligible for the partial exemption if they are registered with and approved by the Belgian Federal Science department.
In order to register the following details are required:
- The identification of the company
- The description of the project or program
- The qualifying employees on the project or program and their qualifications
- The proportion of working time spent on the project or program
- The starting date and the anticipated completion date of the project or program
This registration process will also apply to existing programs, although details of the starting date will not be required for these. The company will also be required to provide notification of any changes to the employees working on the project or program on an ongoing basis.
It is currently not clear as to when this registration procedure will come into effect. It is likely that this registration procedure will apply from 1 January 2014, with a transition period until then.
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 eligible for the partial exemption of withholding tax should review their procedures to ensure that they can continue to use this. Employers should also consider reviewing their current population of qualifying employees to confirm whether their activities will qualify under the new legislation.