According to the 2012 EU Industrial R&D Scoreboard, the European Union (EU) is an attractive location for research and development investments. This is evidenced by the fact that US firms invest ten times more in R&D in the EU than in China and India combined. Within the EU, Belgium has a strong reputation for R&D and innovation, primarily due to the high quality of its education and research facilities, the availability of skilled workers and numerous fiscal incentives for R&D ventures. As a result, many companies continue to prosper within Belgium’s borders.
The pharmaceutical sector is an example of a thriving field based in R&D and innovation. Employing over 30,000 people and accounting for over €36 billion in exports a year, it is clear that this industry has a vital influence on the country’s economy. The chemical and life sciences sector is also a champion of innovation. According to Essenscia, the industry association, R&D investments in this sector rose from €1.85 billion in 2002 to €2.75 billion in 2012. This accounts for 50% of total R&D expenditure by the private sector in Belgium.
Belgium's R&D Tax Incentives
These significant investments in R&D are no coincidence. As the country’s long-term prosperity and growth rate are closely linked to innovation, the government has introduced R&D tax incentives, which aim at encouraging companies to invest in top talent and/or innovation. These incentives include, but are not limited to, the following measures:
Partial withholding tax exemption for researchers
The partial exemption from withholding tax for qualified researchers is generally seen as the most important – and most appreciated – incentive to increase R&D activities in Belgium. In 2013, the Belgian Government made this benefit even more attractive by increasing the exemption rate from 75% to 80%. This means that employers are only obliged to remit 20% of the total withholding tax from qualified researchers and may retain the remaining 80% for company use. As the country has one of the highest labor costs in Europe, largely due to high employer social security charges, this is an extremely attractive measure for R&D activities based in Belgium as it offers an immediate cost reduction.
Patent income deduction
The patent income deduction allows for an 80% deduction from the taxable basis of the gross patent income, which effectively results in a maximum tax rate of 6.8% on this income. All Belgian companies, and Belgian establishments of foreign companies, are eligible for this deduction. The measure covers patents which have been self-developed in a Belgian or foreign-owned R&D center in Belgium. As patents are an important, yet costly, feature of the R&D world, this mechanism is extremely attractive for foreign investors.
Investment deduction for R&D investments and patents
This measure comprises a tax deduction of 14.5% (tax year 2014) of the investment value of assets which aim to promote R&D of new products and advanced technologies that are environmentally friendly. It also applies to patents which have been acquired or self-developed by the company. Moreover, these deductions may be carried forward in case of insufficient profits.
Expatriate tax status in R&D
Foreign executives and researchers who are temporarily assigned to Belgium benefit from tax-free expatriation allowances, which are capped at €29,750 per year. This measure also covers the tax-free reimbursement of installation costs and school fees. Overall, this incentive helps to attract the best foreign researchers to Belgium. The measure also reduces the employer’s social security contributions for the expatriates.
Legal uncertainty and red tape
However, in order to fully benefit from this growing sector, Belgium must tread with care. While the government has taken significant steps in the right direction to promote R&D and innovation investments in Belgium, they must ensure that the costs in terms of administrative procedures do not outweigh the benefits. The new legislation on the withholding tax exemption for researchers is a good example.
“Belgium doesn't need more tax incentives to become the best of class in encouraging R&D and to attract more investments. All it takes is some governmental courage to relax the red tape and allow access to what it already has to offer.”
-Brent Springael, Head of Tax at Bird & Bird and Chair of AmCham Belgium’s R&D and Innovation Taskforce
Technically effective from July 1, 2013, the Belgian Government has once more created uncertainty by failing to specify who qualifies under the ‘research & development’ banner. The government promised clear definitions of ‘Fundamental research’, ‘Industrial research’ and ‘Experimental development’, which would come into effect on January 1, 2014. However, from July 2013 to January 2014, employers were left to determine what does or does not qualify for the withholding tax exemption, which then risks being challenged by the Belgian tax authorities.
Additionally, upfront registration is required, obliging the employer to provide the identification documentation of the company, a description of the project which specifies which type of R&D category it falls under, and the proposed start date and anticipated end date of the project. This obligation not only increases a company’s administrative burden, but also requires a company to undergo significant gymnastics to adhere to the requirements. In an innovative context, it is not easy to define the description and consequent development of a project, as it can depend on the outcome of the initial research. The project can therefore change in nature, content and timing altogether, and the company would have to resubmit its proposal before being able to continue.
As outlined in a new position paper, AmCham Belgium recommends introducing a system whereby companies can notify the authorities retroactively, or at least on a yearly basis, to avoid unnecessary delays.1 AmCham Belgium also recommends broadening the scope of the withholding tax exemption, by expanding the list of recognized diplomas or taking into consideration equivalent experience. The administrative burden and the limited number of researchers who currently qualify for this measure make it less effective for smaller R&D environments.
“Belgium doesn't need more tax incentives to become the best of class in encouraging R&D and to attract more investments, says Brent Springael, Head of Tax at Bird & Bird and Chair of AmCham Belgium’s R&D and Innovation Task Force. “All it takes is some governmental courage to relax the red tape and allow access to what it already has to offer.”
Room for improvement
In the European Union’s 2013 Innovation Scoreboard report, Belgium has been classed as an ‘innovation follower’, with a performance above the EU27 average. However, the EU has signaled that Belgium also has structural weaknesses in financial support and intellectual assets, which mean that the country’s overall performance is far below the EU’s ‘innovation leaders’, including Denmark, Sweden, Finland and Germany. If Belgium wants to become an ‘innovation leader’, it must simplify its complex and cumbersome administration for foreign investors.
For more of our policy recommendations, please refer to our Priorities for a Prosperous Belgium.
1 In January 2014, AmCham Belgium’s Legal & Taxation Committee published a position paper which includes more details on the changes which need to be made to the withholding tax exemption, the patent income deduction and the R&D investment deduction. Please refer to our Position Papers for more details.