Tax advice for creative professions
Nobody likes to pay more taxes than necessary and nothing is as complicated and technical as tax legislation. That is why Sirius Legal has been focusing for years on tax advice, specifically focused on our clients’ activities in software and internet law, creative professions and e-commerce.
At Sirius Legal we provide comprehensible tax advice that allows you as an entrepreneur to concentrate on what is really important: your daily business.
Our tax specialists have twenty years of experience in tax law and can help you with all tax matters, including international asset planning, direct taxes, indirect taxes, customs and excise duties.
At Sirius Legal we can support you with daily compliance with tax legislation. We can also assist you in all kinds of administrative procedures and can represent you in court.
Tax advice in copyright
Belgian law has a very favorable tax regime for transfers and licenses to copyright. Anyone who is creative in one way or another and creates copyrighted content can in this way realize a considerable tax benefit.
After all, transfers and licenses to copyrights are only subject to 15% tax (withholding tax) instead of the normal progressive rates from the income tax. Moreover, the law provides for a flat-rate deduction of professional expenses, which means that the net tax rate can even fall to 7.5%.
For income year 2018, the maximum amount for distributions in royalties is 61.200 euros. This amount is subdivided into different levels with separate deductible fixed costs. For an individual calculation of the benefit that can be obtained, you can of course always contact us.
This is interesting for those who work as independent consultants, for managers (or management companies), but also, for example, to give creative employees a tax benefit or to save the company on wage costs by paying employees partly in royalties.
Which professions can typically benefit from this?
Software developers, web builders, copywriters, directors, draughtsmen and illustrators, architects, designers, advertisers, teachers / teachers, authors and composers, singers, musicians, etc … But also more “classic” employees who regularly write texts or give presentations for their employer may be eligible.
There are of course conditions and restrictions
The most important thing is that the benefit can only be enjoyed by natural persons., not by companies. For example, a payment in royalties is possible from an artist to his management company, but not between that company and the final customer or client.
In addition, the share of the total remuneration that is paid out in copyright must realistically correspond to what can be considered creative creation in relation to the remuneration for work done.
Obviously, there must also be copyright creation. That means that a work must be new and original and must show an intellectual effort by the author. The case law is fairly flexible with these criteria and copyright protection can be obtained quite easily for texts, presentations, images, software, …
Finally, there must be an effective transfer or license from one party to another. It is important to provide a good framework for this, so that in the event of a tax audit, the necessary proof of the actual transfer (assignment) or license (concession) can be submitted. It must also be clear from that agreement that the transfer or license has been made for a fee, otherwise it is assumed to be free (and then the tax benefit will of course lapse).
One of the most important points of attention is to avoid that income that used to be wages or directors’ fees suddenly be reclassified as royalties. In that case, in the event of a tax audit, the structure is in danger of being rejected.
Tax deduction for software innovation
The federal government considers Belgium as a hub for the development of intellectual property. Patents, breeders’ rights, software development,… Belgium must become an attractive base for the future. For that reason, they are working hard on some legal and tax reforms that should promote the development of new software.
Today, companies already have a tax exemption of 80% for income out of sales or licenses of patented products or processes. An important condition for this “old” patent deduction is that an approved patent must be submitted. As a result, a number of important intellectual property rights are lost, such as software in many cases. The long waiting time for a patent to be approved also often proves to be a pain.
To remedy this, a new tax benefit (“innovation deduction”) was introduced in 2017, which applies specifically to software development. The new benefit comes on top of the already very favorable tax treatment of royalties from copyrights that software developers, among others, have been enjoying for several years.
What does this new tax benefit entail?
The innovation deduction allows companies to deduct a maximum of 85% (instead of the 80% that applies to patents) and reduce the tax burden on their software development income to +/- 5%. Amounts that exceed 85% can be transferred to the following year.
With all this, it is no longer necessary to have a research center in Belgium, even the country where patent protection is obtained will be less important in the future.
For companies that are already applying the current patent deduction, a transitional arrangement is foreseen until 2021. During that period, companies can choose and consider which deduction is most advantageous for them in practice.
What is “innovation income”?
Innovation income” is all taxable income from licenses in Belgium, income from damages for copyright infringement and software protection rights and capital gains from the transfer or assignment of copyright.
The innovation deduction can only be applied to net income after deduction of expenses that directly and exclusively relate to intellectual property rights. Companies that have several R&D projects in progress or that are working on “mixed” projects that only partly consist of software development, must therefore be able to correctly divide things up.
Which software does the deduction apply to?
The innovation deduction applies to newly developed software that is protected by copyright and software protection law (and that is therefore sufficiently “original”) and that must be a necessary condition from a research or development program within the company. Moreover, the software may not have generated any income before 1 July 2016. Operations or adaptations of existing software may also be eligible.
In this way, companies can make use of a considerable tax benefit for license fees and sales of new software. But companies that develop computer programs for internal use can now also benefit from the tax exemption. In that case a “fictitious” license fee will have to be calculated, as if the software were licensed to third parties.
Limitation of the deduction
The tax benefit is limited in accordance with the BEPS (Base Erosion Profit Shifting) rules of the EU.
Only the company’s own development can be deducted. This is called the “Nexus” calculation. The result of this is that a Belgian company cannot be used purely as a “transit hatch” without developing its own R&D activity.
Companies that have (partly) purchased intellectual property or have outsourced the research to a related company in another country cannot use the tax deduction on that purchased or outsourced part.
For that reason it is very important to optimally structure the innovative activities within a group for tax purposes, with the necessary attention to transfer pricing.
Will continue to exist: the tax benefit regime for copyright income
In addition to the above-mentioned new rules, physical persons (not companies, but their shareholders or directors and managers) can already enjoy a very interesting tax treatment of income that they receive as compensation or royalties for licenses or sales of software for several years.
Physical persons who develop software and commercialize it through a company can thus pay royalities for an amount of approximately € 61.200 per year, taxed at a fixed liberating withholding tax of 25%. As the law also provides for substantial lump sum deductions that can first be taken into account, the net tax burden on income from royalties for the physical persons behind a company is limited to 7 to 8%.
The combination of both regulations ensures that both the company and the shareholder/manager can benefit from a very favorable tax regime for the commercialization of (new software).
Questions about copyright handling, VAT in e-commerce, the innovation deduction for software development or other tax questions?
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