The innovation deduction. Tax benefit for innovative companies in Belgium

What is innovation deduction (deduction for innovation income) in Belgium?

The innovation deduction, also known as the innovation income deduction (or sometimes referred to in English as Belgian Patent Box or Innovation Income Deduction), is an important tax measure in Belgium that allows 85% of income from certain intellectual property rights to be exempt from tax. This scheme, established in Article 205/1, § 1, paragraph 1, WIB 1992, provides a significant tax advantage for innovative companies.

Since July 1, 2016, the innovation deduction replaces the former patent deduction. Unlike the patent deduction, the innovation deduction has a broader scope and a more favorable deduction rate (85% instead of 80%). In addition, the innovation deduction has unlimited portability of unused deductions, which was not the case with the patent deduction.

The application of this measure creates an effective tax burden on innovation income of only about 4%. For SMEs, this can even be limited to only 3%, making this tax deduction particularly interesting for smaller and medium-sized enterprises.

A key feature of this arrangement is that the portion of the deduction that cannot be deducted for lack of gain, unlimited transferability is to subsequent taxable periods. This makes the scheme particularly interesting for startups and scale-ups that often do not yet make a profit in the early years.

Innovation deduction conditions: what intellectual property rights does the scheme apply to?

The innovation deduction has a broader scope than the former patent deduction. Are you wondering what the conditions are? This tax scheme applies to the following intellectual property rights:

1. Patents and supplementary protection certificates - Learn more about patent law on our page on patent law.
2. Copyrighted computer programs (software) - These are considered an intellectual property right when they result from a research or development program as defined in Article 275/3, § 3 CIR 1992. The eligibility test for a computer program can be done through a opinion of BELSPO (Federal Science Policy). Learn more about software law on our page on software.
   👉 Read more about the Belspo Guidelines 2025 for software
3. Breeders' Rights with respect to crops applied for or acquired after June 30, 2016. More information can be found on our page on plant variety rights.
4. Orphan drugs (drugs for rare diseases) for the first 10 years of entry in the European Register, if applied for or acquired after June 30, 2016
5. Government-granted data or market exclusivity for plant protection products or pharmaceuticals, for the first 10 years

To qualify for this deduction, the company must be full owner, co-owner, usufructuary, licensee or rights holder of the above rights. It is important to note that it is not required that the intellectual property rights be included in the asset of the balance sheet.

Calculation of innovation deduction: steps and formula

Calculating the innovation deduction involves several steps. For those wondering exactly how the innovation deduction calculation works, here is a step-by-step explanation:

Step 1: Determination of net income

First, the net innovation revenue be determined that relate exclusively to a qualifying intellectual property right. In principle, the calculation is done separately for each intellectual property right, but if this is not practically possible, the calculation may be determined by type of product or service, or by group of products or services.

The gross amount of innovation revenue must be reduced by the so-called "global expenses," consisting of:

• Qualifying research and development (R&D) expenditures.
• Expenditure on the acquisition of intellectual property right
• Research and development expenses paid to affiliates

Step 2: Application of nexus breaking

Net innovation income is then multiplied by the so-called nexus break. This break, established by the OECD, ensures that only companies that have developed the intellectual property themselves or whose (part of) the development was outsourced to third parties can take full advantage of the deduction.

The nexus break is calculated as follows:

(qualifying expenses × 130%) / global expenses

The numerator of the fraction consists of the qualifying expenses, namely, R&D expenses either incurred by the company itself or paid to unrelated companies. In order not to unduly penalize companies building on an acquired intellectual property right, the numerator may be increased by 30% (the so-called 'uplift'). However, this 'uplift' may not result in a nexus violation greater than 1.

Step 3: Calculation of the exempt amount.

After applying the nexus break, the result is multiplied by 85%. This yields the amount exempt from tax. This provides an effective tax burden on this income of up to about 4%.

Thus, the formula for the innovation deduction can be summarized as follows:

Innovation deduction = Net innovation revenue × Nexus break × 85%

Innovation deduction historical costs and portability

An important aspect of the innovation deduction is the treatment of historical costs. For the taxable period in which net innovation income is determined for the first time, its amount must be reduced by "global expenses" expensed in previous taxable periods (ending after June 30, 2016).

However, corporations are given the option to deduct these historical expenses on a staggered basis over a period of up to seven taxable periods.

If there is insufficient taxable profit to apply the innovation deduction, the undeducted portion may be carried forward indefinitely to subsequent taxable periods.

Innovation deduction 2024-2025: tax credit for innovation income starting in tax year 2025

According to the Law of May 12, 2024 (published in the Belgian Official Gazette on May 29, 2024), companies have a new option starting in tax year 2025: even if there is sufficient taxable profit, a company can choose not to apply the (carried forward) innovation deduction or only partially apply it and convert it into a non-refundable tax credit for innovation income. This significant change is one of the latest developments in the 2024-2025 innovation deduction.

The amount of this tax credit is equal to the amount of the unapplied innovation deduction multiplied by the ordinary corporate tax rate (25%). Although this measure was originally intended for companies under the Pillar II legislation covered, all companies may choose to do so.

This option may be of particular interest to small companies partially subject to the reduced rate of 20%, as the tax credit is calculated at the standard rate of 25%.

Innovation deduction tax: income eligibility

The innovation tax deduction applies to different types of income:

1. License fees: Royalties, fixed fees, contingent fees, milestone payments (milestones), signing fees, etc.
2. Included royalties: When the company's intellectual property rights itself, a hypothetical license fee is calculated that the company would have received if it had granted a license to an independent third party. This applies to:
   • Income from intellectual property rights contained in the sale of protected products or services
   • Income from intellectual property rights used in the production process
3. Damages: Fees received by a company for the infringement of an intellectual property right.
4. Sales revenue: Amounts received on the disposal of an intellectual property right, provided certain conditions are met.

Software innovation deduction: special rules for computer programs

For software companies, the innovation deduction is of particular interest. The software innovation deduction can be applied under both a traditional licensing model and a Software-as-a-Service (SaaS) model. Copyrighted computer programs are eligible provided they result from a qualifying research or development program and did not generate income before July 1, 2016.

In determining gross revenue from software, the Office of Advance Decisions proposed a methodology based on the "residual profit method. This includes the cost savings and efficiency improvements achieved by the software. The innovation deduction also applies to improvements or modifications of existing software.

BELSPO, meanwhile, has published new guidelines in 2025 on software applications. Read more about the new guidelines here.

If your company is in the software development business, you can find more information on our page about software. For specific questions about SaaS contracts, you can also visit our page on Software-as-a-Service (SaaS). consult.

Innovation deduction accounting and documentation requirements

Correct accounting and meeting the documentation requirement are essential aspects for companies seeking to apply the innovation deduction. Both the innovation deduction accounting and the required documentation must be handled carefully.

Companies wishing to take advantage of the innovation deduction must comply with an extensive documentation requirement. They must keep the following supporting documents available to the tax administration:

1. The actual value of intellectual property rights acquired from a related company
2. The amount of innovation revenue related solely to the eligible intellectual property right
3. The amount of costs to be deducted from innovation income
4. Qualifying and global expenses directly related to the eligible intellectual property right

In order to benefit from the innovation deduction, the taxpayer must attach the statement 275 INNO to his corporate income tax (or non-resident tax) return. Proper accounting for the innovation deduction requires specific knowledge of the tax rules.

VLAIO innovation deduction and other tax measures

For more information and support on innovation deductions, contact the Flemish Agency for Innovation & Entrepreneurship (VLAIO)., which provides extensive information in their grants database.

The innovation deduction can be combined with other tax incentives such as:

• The research and development tax credit
• The research and development investment deduction
• Withholding tax pass-through exemption for researchers

The combination of tax incentives makes Belgium an attractive location for R&D-intensive activities. The Flemish Agency for Innovation & Entrepreneurship (VLAIO) provides information and support in applying the innovation deduction and other innovation support measures.

How can our law firm help you?

As a specialized law firm in tax law and intellectual property rights we can assist you in all aspects of the innovation deduction:

1. Analysis of your intellectual property rights: We investigate which of your intellectual property rights qualify for the innovation deduction.
2. Calculation of deductions: The complex calculation of net innovation income and the application of the nexus break require in-depth knowledge of tax law, which we can provide.
3. Documentation and evidence: We help you meet the extensive documentation requirements necessary to enjoy the innovation deduction.
4. Strategic advice: We advise you on the choice between applying the innovation deduction or converting to a tax credit, taking into account your specific situation.
5. Ruling innovation deduction: When there is ambiguity around the amount of innovation income, we can guide you in applying for a tax ruling from the 'Service prior decisions in tax matters'. A ruling provides legal certainty about the application of the innovation deduction in your specific situation.
6. Litigation Assistance: In case of disputes with the tax administration, we assist you in the administrative or judicial proceedings.

Example innovation deduction and conclusion

Example innovation deduction calculation

Let's illustrate the innovation deduction with a practical example:

A software company has:

• Gross revenue from software: €100,000
• R&D costs in the current year: €30,000
• Historical cost: €20,000
• Qualifying expenses (own R&D): €25,000
• Expenditures on affiliates: €5,000

Step 1: Calculation net income €100,000 - €30,000 - €20,000 = €50,000

Step 2: Nexus breakage calculation (€25,000 × 130%) / (€25,000 + €5,000) = €32,500 / €30,000 = 1.08 → maximum 1

Step 3: Innovation deduction €50,000 × 1 × 85% = €42,500

This amount can be deducted from the taxable base, resulting in a tax savings of €10,625 (at a rate of 25%).

Conclusion

The deduction for innovation income provides an important tax advantage for innovative companies in Belgium. By exempting 85% of income from intellectual property rights from taxation, this scheme encourages investment in research and development.

The recent change allowing conversion to a tax credit provides even more flexibility for businesses to make the most of this tax benefit.

However, given the complexity of the calculation and the extensive documentation requirements, professional advice is essential. Our law firm has the expertise to guide you through this process and ensure that you take maximum advantage of the opportunities offered by the innovation deduction.