INSIGHT: Research and Development Tax Credits—Are You Eligible? (Part 3)

The available incentive and tax credits for R&D in Belgium and the Netherlands and the relevant requirements to be eligible are considered below.

Belgium

R&D Credit

Taxpayers investing in R&D may opt to apply a tax credit of 29.58% (comprised of corporate tax rate of 29%, increased by 2% austerity surcharge which makes a total 29.58% corporate tax rate). For small or medium-sized enterprises or permanent establishments of foreign companies the R&D tax credit which can be claimed is 20.4% (a reduced corporate tax rate of 20%, increased by 2% austerity surcharge) for taxable income up to 100,000 euros ($111,000).

The credit is calculated on the purchase or investment value of newly purchased or manufactured tangible or intangible assets, which are used for business activities in Belgium.

Taxpayers can either offset the tax credit at once in the taxable period of the acquisition, or it may be used gradually or apportioned to the annual depreciation of the asset(s). In the case of insufficient tax against which the tax credit can be set off, a taxpayer can carry forward unutilized tax credit for an unlimited period up to a maximum amount of 505,950 euros for 2019, or such other amount as notified by the tax department.

The following conditions should be met to qualify for R&D credits:

• tangible and intangible assets are used for R&D of new products and technologies that do not have a negative impact on the environment or patents;
• the R&D center must be in existence in Belgium;
• the investment must be made in new assets either purchased or self-developed;
• the asset must be used solely for business purposes;
• the asset cannot be transferred to another party;
• the asset should be capitalized in the Belgium account books as per Belgium accounting standards and depreciated for a period of at least three years.

Partial Exemption in Withholding Tax on Wages Paid to Researchers

Taxpayers involved in R&D activities can also claim partial exemption of withholding tax deducted from wages paid to personnel with a doctorate or master’s degree in the scientific or engineering domain (e.g. sciences, applied sciences, exact sciences, medicine, pharmaceutical sciences, engineering, IT, architecture, product development) performing R&D activities in Belgium.

Taxpayers can remit withholding tax on wages to qualifying personnel to the tax authorities at a rate of 20% of the wage tax that is withheld from the salary. The total withholding tax exemption applied for those with bachelor’s degrees is capped at 25% of the total withholding tax exemption applied for researchers holding master’s degrees and doctorates.

Innovation Income Deduction

New rules were introduced on innovation income deduction to comply with the Organisation for Economic Co-operation and Development (OECD) “nexus” approach, and are effective from July 1, 2016.

Under the modified rules 85% of qualifying patent income deduction is allowed from patents, supplementary protection certificates, qualifying copyright protected software, and various other intellectual property (IP) rights (breeders’ rights and orphan drugs, medicine and pesticides for which data and market exclusivity is available).

The qualifying income also includes capital gains derived from the sale of qualifying IP, embedded royalties and infringement compensations.

Qualifying income is calculated by nexus formula:

Qualifying expenditure to develop IP asset x 1.3*/Overall income to develop IP asset x Overall income from IP asset

*An uplift of 30% of qualifying expenditure is allowed to provide relief for exclusion of acquisition cost and group outsourcing costs.

The deduction results in an effective tax rate of 4.4% on R&D income.

Other Incentive Schemes

There are other incentive schemes such as cash grants and subsidized loans available to Belgium companies engaged in R&D. Taxpayers can take advantage of these schemes, provided they satisfy all the relevant conditions.

Netherlands

R&D Tax Credits

The R&D tax credit reduces the withholding tax withheld on wages or salaries paid to employees performing R&D activities in the Netherlands. Such reduction applies to wages/salaries paid in connection with feasibility studies directed at technical-scientific research or at the technical possibilities of own research and development.

The wage withholding tax reduction is 32% in respect of the first 350,000 euros in salaries/wages paid to employees. The percentage is increased to 40% for start-up companies developing technological products. For wage/salary costs above 350,000 euros, the reduction is limited to 16%.

R&D tax credit can also be claimed for other costs and expenses such as raw materials, investment in R&D equipment, prototype construction used in own (in-house) R&D projects. A taxpayer has two approaches to calculating the R&D tax credit: (a) fixed sum approach; (b) actual costs and expenses.

Under the fixed sum approach R&D credit is calculated by reference to the number of allocated R&D hours per calendar year at the following rates:

• 10 euros per R&D hour for the first 1,800 R&D hours;
• 4 euros per R&D hour for all R&D hours exceeding 1,800.

Repayment is required in cases in which realized R&D hours and costs and expenses are less than forecast.

Under the actual costs and expenses approach, the amount is calculated on the basis of the estimated costs and expenses incurred by R&D work. Costs would include direct costs such as raw materials used in R&D projects, costs related to experiments, the production of trial batches, materials and parts regarding the manufacturing of prototypes by the taxpayer or by third parties, acquisition of licenses for specific software packages, and rental of equipment from third parties.

Innovation Box

Taxpayers in Netherlands can also claim R&D incentive under the innovation box, which is based on the nexus approach in accordance with the recommendations of the final report on Action 5 of the OECD BEPS Project. Under the nexus approach, only profits attributable to in-house development undertaken by the taxpayer qualify for the innovation box.

The following formula is used for calculating the qualifying amount:

Qualifying expenditure to develop IP asset X 1.3/Overall expenditure x Profit from qualifying asset

Qualifying expenditure = direct expenditure incurred in developing IP cost, excluding acquisition cost of qualifying asset and payment made to group entities in carrying out R&D activities.

Overall expenditure = direct expenditure including acquisition cost of qualifying asset and payment made to group entities in carrying out R&D activities.

Profit from qualifying asset = is determined based on transfer pricing principles of individual assets. Profits are only taken into account insofar as they exceed development costs of the qualifying assets.

R&D income under the innovation box regime is effectively taxed at 7% instead of the statutory rate of 25%. Losses are deductible at the statutory rate of 25%, but future profit will be taxed at 25% for the amount of the loss related to the R&D allocated to the innovation box. Any net operating losses resulting from the incentive can be carried back for one year (for corporate income tax) and carried forward for six years.

Planning Points

R&D tax credits provide a source of cash that a business can use towards developing new products and processes or enhancing existing ones. Businesses operating in the above countries should consider the impact of the R&D credit that is available to them, which can help in reducing tax costs. Start-ups that do not generate income or insufficient income to make full use of the R&D tax deduction are entitled to receive a cash refund of the incurred R&D expenses.

Taxpayers should consider:

• whether they satisfy all conditions to claim the incentive. Only direct expenses such as salaries of researchers, consumables, depreciation on assets used in development of research, etc., are eligible to qualify as R&D expenses;
• details of research work carried out;
• maintenance of documentation to provide evidence during tax audits, such as project planning documents, records of trial runs, design and technical documents, etc.
• detailed workings of calculations.

Taxpayers can also explore the possibility of applying for a tax ruling to avoid any uncertainty on R&D tax credits.

There are other incentive schemes such as cash grants and subsidized loans available to businesses engaged in R&D projects. Taxpayers can take advantage of these schemes, provided they satisfy all the necessary conditions.

Rajeev Agarwal is an International Tax expert based out of Doha, State of Qatar.

The author may be contacted at rajeagar2012@gmail.com

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