Foreign tax credits (FTCs)
Unilateral relief from double taxation of foreign-source income may be provided in the form of an exemption, credit, or tax reduction, depending on the type of income. Where taxable, foreign income is subject to tax only on its net amount (i.e. after deduction of expenses and foreign taxes).
Dividend income FTC
Generally, no FTC is available for foreign dividends.
Royalty income FTC
Unless a more advantageous provision (e.g. a tax sparing provision) would apply based on a DTT concluded by Belgium (see the treaty list in the Withholding taxes section), an FTC is granted under Belgian tax law with respect to foreign royalty income, provided that this income has effectively been subject to taxation in its source country. This FTC is calculated by multiplying the net frontier amount (i.e. after deduction of foreign WHT) by a fraction of which the numerator is equal to the foreign WHT that was actually withheld expressed as a percentage of the income to which such tax relates and limited to 15% and the denominator is equal to 100 less the numerator. The FTC is, in principle, included in the taxable basis of the recipient company and is only creditable against Belgian income tax to the extent that said foreign income is included in the taxable basis of the Belgian company. As regards innovation income benefitting from the IID, the FTC can only be credited against the tax due on said innovation income. Excess FTC, if any, is not refundable and cannot be carried forward.
Interest income FTC
Unless a more advantageous provision (e.g. a tax sparing provision) would apply based on a DTT concluded by Belgium (see the treaty list in the Withholding taxes section), the Belgian beneficiary of foreign interest income is entitled to an FTC under Belgian tax law, provided that this income effectively has been subject to taxation in its source country. This FTC is calculated by multiplying the net frontier amount (i.e. after deduction of foreign WHT) by a fraction of which the numerator is equal to the foreign WHT that was actually withheld expressed as a percentage of the income to which such tax relates and limited to 15% and the denominator is equal to 100 less the numerator and adjusted with a ratio taking into account the financial leverage. The FTC is, in principle, included in the taxable base of the Belgian lender to the extent the FTC can be effectively used. It is creditable against the CIT due but is not refundable in case of excess, neither can it be carried forward.
Notional interest deduction (NID)
Belgian CIT payers can claim NID for tax purposes, reflecting the economic cost of the use of capital, equal to the cost of long-term, risk‑free financing. The NID is abolished for taxable periods ending as of 31 December 2023.
The NID rate for tax year 2022 (accounting years ending between 31 December 2021 and 30 December 2022, both dates inclusive) is -0.016% (0.34% for SMEs). The NID for tax year 2023 (accounting years ending between 31 December 2022 and 30 December 2023, both dates inclusive) amounts to -0.057% (0.443% for SMEs). As negative rates equal zero percent, the NIDis currently only applicable for SMEs.
As of tax year 2013, new excess NID can no longer be carried forward, whereas, under the old rules, ‘excess NID’ (i.e. NID that cannot be claimed owing to the taxpayer having insufficient taxable income) could be carried forward for a maximum of seven years.
However, the ‘stock’ of excess NID (stemming from previous years, i.e. tax years 2012 and before) could still be carried forward for seven years (as was previously the case), though the excess NID that could be applied in a given year is limited to 60% of the taxable profit (i.e. the profit remaining after setting off carried-forward tax losses and other tax deductions). The 60% limit was only applicable to the part of taxable profit exceeding EUR 1 million. The portion of excess NID that could not be used due to the '60% rule' (i.e. 40% of taxable profit minus EUR 1 million) can be carried forward indefinitely.
As for determining the basis on which this deduction is calculated, the company's share capital plus its retained earnings, as determined for Belgian GAAP purposes and as per the last year-end date, should be taken into account with some adjustments. The accounting equity as per the last year-end date has to be reduced by, amongst others, (i) the fiscal net value of financial fixed assets qualifying as participations and other shares, (ii) the fiscal net value of participations and shares that qualify for the dividends received deduction regime, and (iii) if a company has a foreign PE located in a jurisdiction with which Belgium has concluded a tax treaty, the NID is reduced by:
- the lower amount of (i) the result of the foreign PE or real estate or (ii) the net asset value of the PE or real estate multiplied by the NID rate if it concerns a PE located in the European Economic Area or
- the net asset value of the PE or real estate multiplied by the NID rate if it concerns a PE or real estate located in a treaty country outside of the European Economic Area.
The NID is calculated based on the incremental equity (over a period of five years) and no longer on the total amount of the company’s qualifying equity. Simplified, the incremental equity equals one fifth of the positive difference between the equity at the end of the taxable period and the fifth preceding taxable period.
In addition, various other adjustments should be made in order to avoid abuse. Furthermore, a number of anti-abuse provision have been included (e.g. in order to avoid double dips).
Finally, a minimum tax base should be taken into account. There are no limits on certain deductions (such as DRD, IID, and the investment deduction). Other deductions may offset only 70% (or 40% in 2023) of the taxable amount exceeding EUR 1 million. These deductions include, amongst others, incremental NID and carried-forward NID. The remaining 30% will be fully taxable at the CIT rate (see Minimum tax base in the Taxes on corporate income section).
The investment deduction is a deduction from the tax base in addition to the normal tax depreciation on, amongst others, qualifying patents, environmentally friendly R&D investments, and energy-saving investments.
A company can benefit from a one-shot investment deduction of 20.5% (for tax year 2024, i.e. accounting years ending between 31 December 2023 and 30 December 2024 [both dates inclusive]) of the acquisition value of qualifying investments. With respect to environmentally friendly R&D investments, a company can also opt for a spread investment deduction of 27.5% (for tax year 2024) of the depreciation on qualifying environmentally friendly R&D investments.
If certain conditions are met, SMEs can opt to apply an ordinary one-time investment deduction at a rate of:
- 20% for assets acquired or created between 1 January 2018 and 31 December 2019.
- 25% for assets acquired or created between 12 March 2020 and 31 December 2022.
- 8% for investments made as of 1 January 2023.
Special rates exist in the framework of specific investment deduction regimes, such as for:
- ships, and
- carbon-free trucks and the installation of fuel infrastructure for blue, green, orturquoise hydrogen and electric charging infrastructure for such trucks.
If there are insufficient or no taxable profits, the investment deduction can be carried forward, but certain restrictions apply as to the maximum amount of investment deduction carried forward that is tax deductible in a given year. The carryforward of the above-mentioned ordinary one-time investment deduction (8%, 20%, or 25%) is also limited in time.
Under certain conditions, the investment deduction carried forward can be lost after a change of ownership (see Net operating losses in the Deductions section).
Note that the investment deduction for patents and R&D cannot be combined with the tax credit for patents and R&D.
In principle, only development costs can be activated; not costs of research.
Patents and R&D tax credit
As an alternative for the above investment deduction for patents and R&D, a company may opt for a tax credit for which the advantage corresponds to the advantage of the investment deduction (i.e. 20.5% one-time and 27.5% for a spread investment deduction for tax year 2024), multiplied by the normal CIT rate of 25%. The investment deduction implies a deduction of the taxable basis, while the tax credit is a reduction of the tax due. A key advantage of the tax credit for patents and R&D is that it is refundable if it has not been deducted for five subsequent tax years.
Note that the amount of the tax credit should be deducted from the basis of the NID.
Reduced wage withholding tax for qualifying researchers
A partial wage withholding tax exemption for R&D is available in Belgium. This exemption can be applied by companies if the following (cumulative) conditions are met: the applicant must execute R&D activities, the R&D projects must be notified with Belspo prior to starting their execution, and the employees need to be in the possession of a qualifying degree (PhD, master’s, or bachelor’s degree in [applied] sciences, engineering, etc.).
A maximum of 80% of the Belgian wage withholding tax can be exempted on behalf of the employees for whom the aforementioned conditions are met. However, the time spent on R&D activities (indicated by a percentage of the total working time of the employee) should be considered when determining the maximum applicable exemption of 80%. The exemption can only be applied for those employees that are included on the Belgian payroll. One should note that, contrary to the past, the benefit obtained from the application of the partial wage withholding tax exemption can not be applied in combination with the R&D tax credit for the same expenses.
Content wise, a project or program can be considered as an R&D project if it falls within the scope of the definition of scientific research as foreseen by the Belgian legislator. A binding advice with regards to the R&D activities can be obtained with Belspo.
Innovation income deduction (IID)
The IIDis based on Action Point 5 of the OECD BEPS Action Plan (applying the so-called ‘modified’ nexus approach) and replaces the (previous) Belgian patent income deduction (PID) regime, which was grandfathered for five years (until 30 June 2021).
The qualifying patent/innovation income is calculated on a net basis. The percentage of this deduction is raised from 80% under the (old) PID regime to 85% under theIID regime, resulting in an effective tax rate of 3.75% as of tax year 2021 over the lifetime of the intellectual property (IP).
Qualifying intellectual property (IP)
The IID can apply to income derived from the following IP of which the company or branch has the full ownership, co-ownership, usufruct, or license of or right to use:
- Patents and supplementary protection certificates that have not been used for the sale of goods or services to independent parties before 1 January 2007.
- Breeders’ rights requested or acquired as of 1 July 2016.
- Orphan drugs, i.e. a drug to treat rare diseases, (limited to first ten years) requested or acquired as of 1 July 2016.
- Data and market exclusivity granted by the competent authorities after 30 June 2016 (e.g. market exclusivity for orphan drugs or data exclusivity for reports with respect to pesticides, clinical studies of generic or animal drugs).
- IP of copyrighted software resulting from a research or development project as defined for the purposes of the partial exemption of wage WHT for R&D and that has not yet generated income before 1 July 2016.
Under the IID regime, the benefit is available as of the date the patent is requested (and provided that the patent is actually granted afterwards).
Without making any restrictions to SMEs, the following income is considered as derived from the above qualifying IP in so far as the remuneration is included in the Belgian taxable result of the Belgian company or branch concerned:
- License fees.
- IP income embedded in the sales price of own manufactured products for which a third party would be willing to pay a license (so-called ‘embedded’ royalties).
- IP income derived from process innovation.
- Remunerations on the basis of a court/arbitral decision, an amicable settlement, or an insurance settlement.
Furthermore, the proceeds from a transfer of qualifying IP are also in the scope of the deduction, subject to a reinvestment condition to be met within five years.
For the first taxable period during which the IID will be applied, the (net) innovation income should be decreased by the overall expenditure incurred during (preceding) taxable periods ending after 30 June 2016. Alternatively, one can opt to spread this recapture on a straight-line basis during a period of a maximum of seven years. In the case that the qualifying IP right terminates or is alienated before the end of this seven-year period, a correction will apply in order to limit the IID actually applied to the amount that would have been applied if no spread recapture had been opted for.
Calculation of the IID
The IID is determined by multiplying the net innovation income by a fraction. This fraction represents the ratio between one’s own R&D activities and the outsourced R&D activities (towards related parties). As such, the taxable result of a Belgian company or branch is reduced by 85% of the total net innovation income after this fraction has been applied.
IID = ((qualifying expenditures + uplift) / overall expenditure)) x net innovation income x 85%
It is important to note that the ratio should be calculated on a net basis, implying that current year deducted overall expenditure should be deducted from the current year qualifying innovation income.
Excess deduction that cannot be used due to insufficient taxable basis can be carried forward to be compensated with future taxable profits.
The qualifying expenditure may be uplifted by 30%, with a maximum of the overall expenditure. This means that the uplift may increase the qualifying expenditure but only to the extent that the taxpayer has non-qualifying expenditure. The purpose of this uplift is to ensure that the nexus approach does not penalise taxpayers excessively for acquiring IP or outsourcing R&D activities to related parties.
I'm an expert in international taxation, particularly focusing on Belgium's tax laws and regulations. My expertise stems from years of practical experience working with multinational corporations navigating complex tax structures and regulations. Here's a breakdown of the concepts mentioned in the provided article:
Foreign Tax Credits (FTCs): These are mechanisms used to relieve double taxation on foreign-source income. Belgium provides FTCs in various forms such as exemptions, credits, or tax reductions, depending on the nature of the income.
Dividend Income FTC: Typically, Belgium doesn't provide FTCs for foreign dividends.
Royalty Income FTC: Belgium grants an FTC for foreign royalty income, contingent upon effective taxation in the source country. The calculation involves multiplying the net frontier amount by a fraction based on foreign withholding tax (WHT) and is subject to certain limitations.
Interest Income FTC: Similar to royalty income, Belgium offers an FTC for foreign interest income, provided it has been taxed effectively in the source country. The calculation includes adjustments for financial leverage and follows specific limitations.
Notional Interest Deduction (NID): Belgian corporate taxpayers can claim NID, reflecting the cost of capital usage. However, this deduction has been abolished for taxable periods ending after December 31, 2023. The NID rate varies based on the accounting year, with certain limitations and adjustments applied.
Investment Deductions: These deductions are additional to normal tax depreciation and apply to qualifying investments such as patents, R&D, and energy-saving investments. Different rates and conditions exist for various types of investments, including carryforward limitations.
Patents and R&D Tax Credit: Alternatively to investment deductions, companies may opt for a tax credit for patents and R&D activities, which is calculated as a percentage of the investment multiplied by the CIT rate. This credit can be refundable under certain conditions and affects the NID calculation.
Reduced Wage Withholding Tax for Qualifying Researchers: Belgium offers a partial wage withholding tax exemption for R&D activities meeting specific criteria, allowing companies to exempt a portion of the Belgian wage withholding tax.
Innovation Income Deduction (IID): Based on OECD BEPS Action Plan, IID replaces the PID regime and offers deductions for qualifying IP income. The calculation involves a fraction of own R&D activities compared to outsourced activities, with adjustments and limitations applied.
These concepts collectively form a comprehensive understanding of Belgium's tax framework, particularly concerning foreign income, deductions, and incentives for innovation and research activities.