A closer look at tax credits for R&D

The tax credit for Research and Development is a preferential measure created by the government and intended to favour companies that invest in innovative products and services. The material requirements are very strict, as is their application by the tax authorities. Forewarned is forearmed.

Michiel Vlaeminck

Needless to say, the R&D tax credit (R&D TC) applies only to investments in R&D. If a company chooses to employ this tax credit, it can no longer apply the investment deduction for patents or environmentally-friendly R&D investments at a later date. The credit itself may be calculated in two different ways and is subject to various material and substantive requirements.

Calculation of the tax credit

You can choose to apply the tax credit all at once or to spread it out. If you decide on the one-time option, the credit will be calculated based on annual investments in R&D at a rate of 13.5%. If you opt for spread payments, the credit is calculated based on the depreciation of the R&D investments and the rate is 20.5%.

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R&D investments of €10,000, depreciated over 5 years
0%
Spread tax credit rate: 20.5%
0%
One-time tax credit rate: 13.5%
0%
Nominal corporate tax rate: 25%

One-time credit: €10,000 x 13.5% x 25% = €337.50

Spread credit: €10,000 x 20% x 20.5% x 25% = €102.50 (for the entire depreciation period)

The tax credit is deducted from the corporate tax owed, unlike the investment deduction, which is deducted from the taxable base. The tax credit is also refundable if not utilised after four years, while the investment deduction simply carries forward.

Material and substantive requirements

The material conditions for these investments are broadly equivalent to those for the (general) investment deduction:

  • The investments are in tangible or intangible fixed assets;
  • They are new Investments;
  • They were obtained or accomplished in the year itself;
  • Investments that are excluded (such as cars) are not eligible;
  • The use of the assets may not be transferred to a third party.

Additionally, the law sets out two substantive requirements. The investments must concern:

  1. “fixed assets used to promote research and development of new products and future-oriented technologies”; and
  2. “which have no effect on the environment or aim to limit the negative effect on the environment as much as possible.”

Neither the legislator nor the tax authorities provide any further guidance on what is meant by the promotion of Research and Development. To assess whether a particular activity counts as R&D, you can refer to the OECD’s so-called ‘Frascati Manual’ (www.oecd.org/sti/frascati-manual-2015-9789264239012-en.htm).The following characteristics of R&D activities are particularly important:

  • novel;
  • creative;
  • uncertain;
  • systematic; 
  • reproducible.

In de boekhouding

With regard to the capitalised development costs, the accounting treatment determines the tax treatment. In other words, if a cost is eligible for capitalisation as a development cost for accounting purposes, then the capitalised cost must be eligible for the tax credit (in principle). Reference may be made to the thorough CBN recommendation 2016/16 on Research and Development costs.

Regarding the effects on the environment, the legislator has decided to engage a specialised service per region to test this requirement:

  • Brussels: division ‘Inspectorat et sols pollués’ de Bruxelles Environnement / afdeling ‘Inspectie en verontreinigde bodems’ van Leefmilieu Brussel;
  • Wallonia: département du Développement du Service Public de Wallonie;
  • Flanders: afdeling ‘Partnerschappen met besturen en maatschappij’ van het departement ‘Omgeving’.

To obtain an environmental certificate, companies must submit a well-substantiated request to the department for each year they wish to make use of the R&D TC. This certificate is appended to the corporate tax declaration. For more information, see the inset ‘How to request an environmental certificate’.

In addition to the certificate, the tax declaration must also be accompanied by the 275W form. This form provides figures on the investments that are eligible for the credit – in the case of the spread tax credit, the relevant depreciations – and the exact amount of the tax credit.

Failure to add one or both of these documents, or doing so too late, can lead to the tax authorities refusing the R&D TC for the entire investment to which this failure relates.

Stijn Rasschaert

How to request an environmental certificate

This form requires that you demonstrate the “environmental impact-limiting character” of the new products and future-oriented technologies in practice. For example, you must provide concrete answers to the following questions:

  • What new products and/or future-oriented technologies have resulted from the R&D research?
  • What do these aim to change in relation to existing products and/or technologies?
  • What are the environmental effects of these changes?

As the processing of applications is frequently delayed (and the legislator has not specified a time limit), you may not yet have received your certificate when the time comes to submit your declaration. In this case, confirmation of receipt of the request is sufficient. Our advice? Request the environmental certificate before you are subjected to a tax audit.

What about software development?

The software sector involves a great deal of R&D that meets the conditions set out in the so-called ‘Frascati Manual’ (OECD). All this software development can be eligible for the R&D TC. However, much remains uncertain, as the legislator did not take software development into account in creating this legislation.

For instance, it can be hard to tell whether software has a “limiting environmental impact”. After applying to the Flemish certification service for clarification, it was orally confirmed that the software in question meets the environmental condition.

Softwareontwikkeling kan in aanmerking komen voor het BK O&O.

However, a tax audit may lead to disputes about the prohibition against the transfer of use (of the investments) to third parties. Though software remains the property of the developer, the right to its use is sold to third parties via licences. Strictly speaking, one can therefore claim that the use has been transferred to these third parties, making the investments ineligible for the R&D TC.

On the other hand, it can also be posited that licensing of software is not a “transfer” of the developer’s right of use as such. Consider the rental of a party marquee. As the marquee’s owner cannot use this marquee themselves for the duration of the rental, they have actually transferred their right of use. Therefore, they are not entitled to an investment deduction. When selling a software licence, however, the owner retains their own right of use. In other words, they have not transferred their exclusive right of use and should remain entitled to the investment deduction. (There are other arguments in favour of this as well, but they are outside the scope of this article.)