New limitation for the Belgian R&D tax credit

New limitation for the combined use of the R&D tax credit and payroll withholding tax exemption for R&D employees

Belgian tax law offers companies a wide range of incentives for conducting research and development (R&D) activities and the exploitation of intellectual property (IP). The incentives are available on the income (e.g. innovation income deduction), expense (e.g. 80% payroll withholding tax exemption for qualifying R&D employees) and investment (e.g. the R&D investment deduction or the equivalent R&D tax credit) side of innovation. We refer to our brochure for a full overview of these incentives (link).

The use of the R&D and IP-related incentives can be combined by the same taxpayer and with respect to the same activities. However, for the first time, Belgian Federal Parliament recently introduced a limitation on the combined use of the R&D and IP-related incentives. This limitation only applies to the tax credit for investments in research and development and patents (“R&D tax credit”), if the same company also claims the 80% payroll withholding tax exemption for R&D employees. Important to note is that the limitation does not apply to the R&D investment deduction.

R&D tax credit

The tax credit for eligible R&D activities and patents entitles a Belgian company or Belgian establishment of a foreign company to apply a deduction from the corporate income tax due (if any). The tax credit is equal to the R&D investment deduction (being a tax deduction to decrease the taxable profit), multiplied by the nominal corporate tax rate of 25%. Excess R&D tax credits are carried forward, and can be used within certain limitations. The remaining balance after five years is reimbursable (to the extent that the tax credit is not effectively used within this timeframe), which results in a cash benefit. There are specific formalities that need to be fulfilled in order to claim the R&D tax credit.

Even though the tax advantage generated by the R&D investment deduction is principally equivalent to the tax advantage of the R&D tax credit, the R&D tax credit may be preferred (instead of the R&D investment deduction), resulting from the relatively higher limitation thresholds and the various mechanics in the Belgian Income Tax Code that relate to the use of tax credits (e.g. no impact of the loss limitation rule, possibility to offset the tax liability resulting from a minimum taxable basis, refundable after five years, etc.).

Partial payroll withholding tax exemption for R&D employees

An 80% exemption of Belgian payroll withholding taxes can be claimed by companies employing R&D employees (researchers, scientific workers, engineers, developers, etc.) in Belgium. This regime can result in a material cash saving in the hands of the employer. Shortly put, the conditions to apply the partial payroll withholding tax exemption are:

• The employee should have a qualifying degree. Doctoral, master and bachelor degrees may be eligible, but note that the reduction for employees with a bachelor degree must be limited to maximum 25% of the reduction applied to employees with a master or doctor degree.

• The employee must be active in R&D projects as the benefit will only apply to that extent (e.g. if the employee is involved in R&D projects for 75% of its professional time, then only 75% of its payroll withholding taxes may benefit from the exemption).

• The registration of the R&D projects and the corresponding employees should be timely registered with the Belgian authorities (via the BELSPO portal).

The part of the withholding taxes that do not have to be paid to the Belgian tax authorities should be recorded as miscellaneous income in the profit and loss statements (no direct compensation of the payroll expenses and the exempted payroll withholding tax).

Combined use of both incentives

In practice, Belgian companies often combine the application of the payroll withholding tax for R&D employees with the application of the R&D tax credit. As of the financial year ending per 1 April 2022, the calculation basis of the R&D tax credit will be limited for these companies. The companies having a financial year following the calendar year will be impacted by this rule in the (current) financial year 2022.

The limitation rule will apply to the extent that the R&D tax credit covers capitalized salary expenses, for which the R&D payroll withholding tax exemption was claimed. The exempted payroll withholding tax will then need to be eliminated from the calculation base of the R&D tax credit – to basically avoid “double dips”. This limitation rule may therefore result in a higher tax cash-out, the need to carry out more tax prepayments, a lower amount of deferred tax assets to be recognized, etc.

Note that a similar limitation rule is (currently) not foreseen for the R&D investment deduction. As a result, the R&D investment deduction may become more interesting compared to the R&D tax credit for certain taxpayers – depending on the numbers at stake and the factual circumstances – if they would not have irrevocably opted for the application of the R&D tax credit.