Like many companies, you may have already taken advantage of the partial exemption from payment of withholding tax for R&D (DPP). This is a tax incentive offering a reduction of up to 80% on the salaries of your researchers. While it’s an opportunity not to be missed, it’s also one that requires careful identification of eligible personnel… With the DPP, you are walking a tightrope between excessive caution and over-optimism. And if you get it wrong, you risk suffering the wrath of the tax authorities further down the line!
It’s no secret: Belgium is the place to be when it comes to tax benefits for research and development (R&D). The country has a generous tax framework, built, notably, around the partial exemption from payment of withholding tax for researchers (DPP). This is a tax exemption making it possible for qualified researchers to be hired at a limited cost. Such measures have seen R&D spending in Belgium rise from 1.84% of GDP to 2.58%, or more than €11 billion, between 2007 and 2017 alone. This is above the European average, and close to the 3% mark set by the European Union to boost research on the Old Continent.
This success owes a lot to the DPP! Because of it, Belgium can boast of being an attractive location for innovative companies, with its central position, highly qualified human resources and the presence of high-performance clusters, in terms of research institutions, universities, companies and public institutions. Belgium has all the right things in place, but nothing happens automatically. The money is available, but it is up to companies to claim it. And the benefit is not without risks, which often turns the process into a real headache.
INCENTIVE NUMBER ONE… UNDER-UTILISED
The DPP is a great example of something simple to understand, but difficult to apply. This is not only due to the amount of red tape, but also to “fuzziness” in interpreting the rules. This legal uncertainty, combined with changes to the regulations, raises legitimate doubts, for example, about the eligibility of degrees. And for good reason: depending on their nature, some employers have to show greater transparency than others – private companies especially (excluding Young Innovative Companies [YICs] and companies working with the academic sector or an accredited institute), which must comply with stricter access conditions. For example, universities can, in principle, take into account the full salary of the researcher, with no degree requirement for these staff members (despite differences between the tax authorities and BELSPO on the definition of an “assistant” or “post-doctoral student”). Flexibility is also granted to YICs regarding their technical and support staff. If you are not among these categories of employers, your payroll will have to come under even more scrutiny. Let’s take a closer look.
DOCTORS, MASTERS & BACHELORS
The DPP was introduced in the early 2000s as an advantageous tax provision aimed, among other things, at companies employing staff with a master’s or doctorate degree who carry out R&D projects or programmes. This exemption has evolved over the years and has been extended (in two stages) to certain holders of bachelor’s degrees since 2018. Specifically, the DPP represents a saving of 25% on salaries, since you only have to pay 20% withholding tax to the tax authorities. That’s a big boost for your cash flow. You just need to roll up your sleeves to implement the measure…
- WHICH DEGREES ARE ELIGIBLE?
PhDs and master’s degrees in exact or applied sciences; civil engineers; degrees in medicine, veterinary and pharmaceutical sciences; those in industrial and applied biological sciences; or master’s degrees in architecture and agronomy.
Not included Note that economists, commercial engineers or lawyers are not covered by the DPP.
Holders of Bachelor’s degrees are now admitted under (almost) the same conditions, provided they have a bridging degree or equivalent in certain disciplines: from biotech to health care, industrial sciences and technology, paramedical science, product development and IT or nautical sciences.
Community lists… Keep in mind that these lists are not exhaustive. Moreover, to complicate matters further, they vary – albeit slightly – depending on the Community (Flemish and French).
Equivalent experience… In certain specific cases, this could be taken into account, but you will obviously have to justify your claim.
- WHAT ARE THE CONDITIONS?
You may be up to speed on the degree side, but that’s not all! For example, you still have to check and certify that your staff are working on projects or research programmes, which is no simple matter. You will also need to determine the exact amount of working time dedicated to these R&D activities – and provide supporting evidence. This is an obligation that does not apply to the academic sector.
- HOW MUCH?
If you can tick all the boxes, the rule is as follows (since 1 January 2020): you will be exempt from paying 80% of the personal tax for holders of doctor’s, master’s and bachelor’s degrees.
There is a ceiling… Because the exemption granted to holders of bachelor’s degrees is limited to 25% of the total amount of the exemption for the other two types of degree. This limit doubles if you are recognised as a “small company” according to the NBB’s definition (fewer than 50 employees, a turnover excluding VAT of less than €9 million and a balance sheet total of less than €4.5 million). We warned you, you have to hang on!
Let’s take a simple case: you employ two holders of master’s degrees and four of bachelor’s degrees, all six of which are working on an applied research project on a full-time basis. How do you apply the DPP?
- If the withholding tax deducted from the monthly salary of your two master’s degree holders is 2,500 euros, you only need to pay the tax authorities 500 euros (2,500 * 20%). So you save 2,000 euros!
- And for your four bachelor’s degree holders, your employer’s contribution might be 3,800 euros per month. With the 80% DPP, that amount could drop to 760 euros. That’s a reduction of €3,040… But don’t forget to apply the 25% ceiling.
- The exemption cannot exceed 25% of that of your masters (2,000 euros), so your bachelor’s degree benefit drops from 3,040 euros to 500 euros. Still, it’s better than nothing…
PLAN, OPTIMISE… JUSTIFY!
Reading between the lines, you have a few tools at your disposal to maximise the benefits of the DPP. You need to play by the rules, have complete control over your payroll, organise your R&D programmes as well as possible, anticipate pitfalls and base your tax position on solid documentation. And for good reason – you need to be able to justify the time spent by your employees on a given project, produce completed timesheets, provide detailed job descriptions, offer proof of the required degrees, etc. – for every employee! And don’t forget to submit the various declarations regarding withholding tax on earned income in the correct form and within the correct deadlines. Unfortunately, this administrative mountain frightens off some companies who would have everything to gain from it. Other companies choose to go for the DPP, but with excessive caution, under-using the system. Bolder companies might opt for the “overly optimistic” approach… which is often fatal when it comes to the tax audit!
SWORD OF DAMOCLES vs. GUIDANCE
Just imagine. In consultation with your social security service, you decide not to pay 80% of the withholding tax for your six researchers (from the example above). That’s 30,000 saved over the year! At the time, you take full advantage of this and save 2,500 euros in your cash flow every month. A real bargain, you might think – except that nearly one out of every two tax audits results in an adjustment for incorrect application of the DPP. What with amounts unpaid, fines and late payment interest, the taxman’s backlash can be painful if you are unable to defend yourself. The risks of getting it wrong are numerous: the eligibility of degrees, the R&D nature of your activities, the category of your company, the pro rata allocated to each member of staff, the application of the ceiling, etc. Specialised support will help you find your way through this procedural labyrinth, optimising your profits and preparing for your tax future, while securing your current stratagem.