Partial withholding tax exemption for Research and Development: bachelor’s degrees also qualify

Belgium is keen on spurring research and development (‘R&D’) through a variety of tax measures such as the innovation income deduction, the tax credit for R&D and the partial withholding tax exemption for R&D. The scope of application of the latter tax has recently been broadened by the Corporate income tax reform Act of 25 December 2017. Indeed, the Act allows for a (phased) extension of the wage withholding tax exemption for scientific research personnel to include holders of a bachelor’s degree. Now that the final legislative texts have been voted, it is clear that the rules applicable to holders of a bachelor’s degree are not identical to those holding a master’s or PhD. The Act also makes it clear that not all bachelor’s are alike…

Promoting R&D

For many years now, Belgian aims to promoting itself as a country with an interesting investment climate, by, amongst other measures, introducing tax incentives for R&D. Even though the initiative thereto is often taken on the European level, our country has, independently, taken many steps forward on promoting R&D and consistently ranks above the European average. It seems that tax incentives such as the innovation income deduction, the investment deduction and the tax credit for R&D are yielding results.

Significant tax saving through a partial withholding tax exemption

Another popular measure is the partial withholding tax exemption for R&D of article 275/3 ITC. Pursuant to this scheme, companies that employ researchers can benefit from a partial exemption from payment of withholding tax on their wages. They must transfer only 20% of the withholding tax due on the wage of these researchers to the tax authorities, while they withhold the 100% that would normally be due. Hence, they can retain 80% (an advantage that is added to the taxable basis of the company).

Since the salary withholding tax can be rather high, the partial withholding tax exemption allows for a significant tax saving. In practice, however, we see that many employers that qualify do not make use of the scheme (yet).

Partial exemption extended to holders of a bachelor’s degree

Until recently, to qualify for the partial payroll exemption, the wages had to be paid to researchers that hold a PhD or a master’s degree in a specific area of study listed in art. 275/3, §2, 2° ITC (e.g. sciences, medicine, architecture etc.).

Already in the Summer Agreement (2017), the Federal Government announced its intention to broaden the scope of application of this tax incentive, to include certain holders of a bachelor’s degree. Practitioners had to wait until recently to see which types of bachelor’s degrees would qualify.

The Corporate income tax reform Act of 25 December 2017 has now been voted. The Act makes a distinction between two types of bachelor’s, namely academic bachelor’s on the one hand and professional bachelor’s on the other hand.

As far as the qualifying academic bachelor’s are concerned, the Act simply refers to the same areas of study that apply to PhDs and master’s (see above).

As far as professional bachelor’s are concerned, however, the Act contains some novelties. In the Flemish Community degrees in the following disciplines qualify: biotechnics, health care, industrial sciences and technology, as well as nautical sciences, science in business administration and business administration, with a focus on IT and innovation.

Rules are not fully identical

The Act is a welcomed boost for those active in R&D. Nonetheless, one must consider certain limitations:

Firstly, the Government has opted for a “phased” entering into force. This means that during the first two years (for wages paid as from 1 January 2018 to 31 December 2019) the exemption is only granted for 40%. It is intended that as from 2020 this will be increased to 80%, to be on the same level as holders of a PhD and a master’s degree.

A second limitation that needs to be considered is that the total amount of the exemption for bachelor’s can not exceed 1/4th of the total amount of the exemption (or ½ for companies that qualify as a “small company” pursuant to article 15, §§1 to 6 of the Company Code). This is because the legislator assumes that the holders of a PhD or master’s degree will be responsible for the most innovative aspects of the research project whereas the bachelor’s will mostly have a supporting function.

In any case, if a company employs such researchers (in the right context of a qualifying research project), it is important to know that the amendments are applicable as from 1 January 2018. Hence, one can already apply the new partial payroll exemption already today, subject to the condition that the R&D project has been reported upfront with the Science Policy Office (BELSPO).

Do you wish to receive more information about this exemption? Do not hesitate to contact us. Mythra has ample experience in reporting projects with BELSPO or applying for a (binding) advice from BELSPO on whether a project qualifies for the exemption.