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On 2 May 2024, the Belgian Parliament approved a bill modernizing the existing investment deduction regime. The main objective of the reform is to replace, update and modernize the list of qualifying assets and technologies and corresponding rates.
In addition, the same bill introduced changes to the Innovation Income Deduction (IID) regime. The enhancement to the regime allows taxpayers to not deduct the full amount of IID from their net taxable basis, but instead, to convert the non-utilized amount into a new non-refundable tax credit available for carry forward. This is in particular relevant for Belgian taxpayers in scope of the recently introduced global minimum tax or Pillar Two rules as this will enable such companies to more accurately manage their effective tax rate.
Investment deduction regime
Background
The current investment deduction for qualifying tangible and intangible assets entitles a Belgian company or a Belgian permanent establishment of a foreign company to apply a deduction for tax purposes in addition to the annual depreciation expense of qualifying assets acquired or established.
Depending on the type of asset, the investment deduction can be calculated either as a percentage of the acquisition value of the qualifying asset (“one time” deduction) or as a percentage of the annual depreciation amount in which case the investment deduction is spread over the depreciation period (“spread” deduction). The applicable percentages may vary annually. Specifically for investments in research and development and patents, an alternative tax credit is available as well.
Besides streamlining and simplifying current procedures, the main objective of the reform is to replace, update and modernize the list of qualifying assets and technologies taking into account today's sustainable transition needs and new technologies. In addition, the applicable rates will be fixed and set by law so that they no longer will be subject to change annually with the aim to improve legal certainty and foreseeability.
The conditions to apply investment deduction, the list of excluded investments and the availability to carry forward any excess generally remain unchanged.
New types of investments and applicable percentages
The new regime introduces three categories or ‘tracks’ of qualifying investments and technologies.
i. Base deduction
The base deduction is the most accessible category and can be applied without any formal requirements to support investments that are used in a sustainable manner. Investments made in assets or technologies using environmentally and climate harmful substances are excluded, except for those assets for which there is no economically comparable carbon zero-emission alternative available. This category is only available for individuals and small companies.
Due to its easy access and broad scope, the rate is 10%. An increased rate of 20% is available for investments made in digital assets such as software to support digital payments and invoicing systems, digital accounting systems, digital CRM-systems, digital e-commerce platforms and digital systems to secure information and communication technology.
A taxpayer claiming this deduction needs to add form 275U or 276U to its income tax return. No other formalities are required.
ii. Thematic deduction
The thematic deduction is specifically intended to support the following type of investments:
- Investments relating to the efficient use of energy and renewable energy;
- Investments in zero-emission transport;
- Environmentally friendly investments; and
- Supporting digital investments related to the three previous types of investments.
A detailed list of qualifying investments and technologies, per type, will be published by Royal Decree and will be updated regularly.
This category can be applied by both individuals and companies. The applicable rate amounts to 40% for individuals and small companies and 30% for other companies. In order to claim this deduction, a specific certificate will need to be obtained from the competent authorities confirming that the investment made is a qualifying investment.
Note that this deduction is not available for companies that (i) are considered as a company in difficulties, (ii) have received a recovery notice from the European Commission with respect to unlawful state aid or (iii) requested regional aid (exceptions may apply).
iii. Technology deduction
The third category corresponds to and replaces the current investment deduction for environmentally friendly investments in research and development and patents.
The rate is 13,5% for patents and for the one-off deduction for investments in research and development and 20,5% for the spread deduction for investments in research and developments (including capitalized personnel expenses). These percentages will also apply for the alternative tax credit for patents and investments in research and development.
This deduction is subject to compliance formalities and a specific certificate will need to be obtained as well.
Other relevant considerations
A taxpayer can only choose one of the above three categories if a specific asset or technology qualifies for more than one of the abovementioned categories.
In principle, capitalized employee expenses form part of the acquisition value on which the investment deduction is calculated, for example when investments in research and development are being made. In this respect, subject to certain conditions, employers may benefit from a partial wage withholding tax exemption for qualifying employees and researchers. The gross amount of withholding taxes is generally capitalized, including the partially exempted amount. Under the new rules, this exempted part is to be excluded from the base to calculate the investment deduction to avoid a cumulation of tax advantages. Note that this exclusion already applies when calculating the alternative tax credit for research and development.
Entry into force
The new rules enter into force for qualifying investments acquired or established as from 1 January 2025.
Innovation Income Deduction
Background
The IID is an incentive which provides for a deduction of 85% of the qualifying net IP income, effectively reducing the related maximum effective tax rate to 3,75%. The innovation income deduction is applicable to Belgian companies as well as foreign companies having a permanent establishment in Belgium, irrespective of their size or industry. To the extent there is not sufficient profit available, the excess part may be carried forward.
Voluntarily waiver and conversion into non-refundable tax credit
This new bill introduces the possibility for taxpayers to deduct (or not) a part (or all of) the innovation deduction, both of the year itself as well as any amount carried forward from previous years from their net taxable income. The unused amount can be carried forward as a non-refundable tax credit (so-called “tax credit for innovation income”) .
This non-refundable tax credit can be carried forward indefinitely and taxpayers have the option for each taxable period whether to apply the credit or not, regardless of the availability of sufficient taxes to offset the tax credit.
Similar to some other carried forward tax attributes, any tax credit carried forward can be forfeited upon a change of control that does not meet legitimate financial or economic needs.
Based on the preparatory works, the rationale for this change is to ensure that the tax advantage, that is at risk of being lost for multinationals that are subject to an additional global minimum tax or Pillar Two (see Tax Alert: Belgian parliament approves draft bill on Pillar Two (ey.com)) due to the application of the IID, is being deferred. As a reminder, the objective of Pillar Two is to ensure that qualifying MNE’s are subject to a minimum tax rate of 15% in each country where they are present. As such, in-scope companies are now given the option to voluntarily increase their tax expenses, by not deducting the entire amount of (carried forward) IID as a result of which their effective tax rate would increase to 15% (or higher). When the company’s ETR is higher than 15% in a (future) given year, the new tax credit could be used.
The bill explicitly states that the impact of this new tax credit will be evaluated as from 2026 against the budgetary cost of the measure and Belgium’s competitive position vis-à-vis its neighboring countries.
For the avoidance of doubt, all corporate taxpayers are entitled to benefit from the new credit for innovation income.
Entry into force
The new rules enter into force as from assessment year 2025, i.e. financial years ending between 31 December 2024 and 30 December 2025 (both dates included).
Implications to businesses
The new investment deduction regime is a welcome update and taxpayers should ensure that they are claiming the benefits they are entitled too. To successfully claim these benefits taxpayers should, however, timely consider the required compliance formalities. The lack of detail currently available as regards which assets and technologies qualify require that taxpayers should continue to closely monitor any future developments.
Companies benefitting from the IID, and especially MNE’s in-scope of Pillar Two, should model the impact of the possibility to partly of fully voluntarily waive the IID and convert such amount into a non-refundable tax credit available for carry forward (and when to use such credit).