Are you conducting research activities? Don’t miss out on the partial exemption from payment of withholding tax on earned income (DPP). This is an extremely advantageous niche tax… but also a highly technical one. Did you know, for example, that not all categories of employer – from universities to the private sector – are in the same boat? These are differences that you need to know how to find your way around in order to maximise your earnings.
Belgium is a land of opportunity for innovative companies. And these are not empty words! Our country has major benefits for attracting heavyweights and looking after the jewels in its crown. At the forefront of this is an attractive fiscal framework for companies, from major pharmaceuticals to the Belgian biotech boom, via a wide variety of sectors, all of which are involved in research and development to some extent. And for good reason: R&D is no longer the reserve of scientific institutions or the academic sector – many large corporations and start-ups rely on innovation to underpin their growth.
It is their lifeblood on an international level, and it’s why the European Union is encouraging its Member States to raise their investment in R&D to 3% of their gross domestic product (GDP). Even though there is no room for complacency, Belgium is doing quite well in terms of this European goal, something that owes much to the partial exemption from payment of the withholding tax for scientific research (DPP).
DPP AT THE FOREFRONT
In the race for R&D, Belgium has understood the importance of relieving companies of the burden on employment – in other words, of reducing labour costs to enable innovative companies to attract top-flight researchers without spending a fortune. This is key when competing with other nations and avoiding the brain drain. The DPP is at the forefront of this struggle, since it allows companies that are carrying out R&D projects or programmes to benefit from a tax break on the withholding tax paid to the tax authorities. This is a tax deducted monthly at source by the employer, which varies according to a number of factors – salary level, the worker’s tax situation, etc. – and can be up to 40% of the pay packet. The 80% waiver on this deduction is therefore a windfall not to be missed! Thanks to the DPP, you only have to pay 20% of the tax to the tax authorities, so you don’t have to shell out your cash. Now that we’ve shone a light on the interesting part, let’s get to the slightly darker part of the picture: this tax system is simple to understand, but difficult to apply!
Let’s skip over the initial (major) issues – the definition of R&D, eligibility criteria for personnel, etc. – and focus on the ‘nature’ of employers. Originally, the DPP was reserved for the academic sector (universities and colleges) and research funds (FFRS, FWO and FNRS), but fortunately the niche has since been widened to include all businesses employing researchers – while retaining specifics in terms of application, according to the “category”. In other words, a start-up does not enjoy the same privileges as the FNRS, particularly as regards the eligible personnel, the rules of calculation and certain administrative obligations. Let’s break this down here: which entities can claim this exemption?
- CATEGORY 1: Universities, colleges, accredited scientific institutions, research funds, etc.;
- CATEGORY 2: Companies that have signed a collaboration agreement with one of the entities in the first category; This partnership should be the subject of a contract between the company and the university (for example) and ideally specify the names and functions of the researchers involved.
- CATEGORY 3: “Young Innovative Companies” (YICs), i.e. small companies, less than 10 years old (their creation not being the result of a takeover, merger or restructuring) and which allocate 15% of their expenditure to research;
- CATEGORY 4: All other employers: private sector companies, as well as foundations and NPOs, that employ researchers with specific degrees (bachelor’s, master’s or doctorate).
WHY DOES THIS MATTER?
As you can see, application of the DPP will vary depending on the nature of the entity.
- The degrees: The first two categories are not subject to strict eligibility requirements for their staff. Holders of both a master’s degree and a vocational bachelor’s degree are eligible if they are research assistants or post-doctoral fellows. Even equivalent experience can count within the framework of partnerships. It is the same for a YIC, where this involves scientific as well as technical and support staff (including if practical experience might be required), but excluding administrative and commercial staff. This boon is not enjoyed by the last category, since only certain specific degrees are eligible (see the Flemish and French Community lists).
- On a pro rata basis: Another difference is that universities can take into account the researcher’s full salary, regardless of the working time allocated to the project. This is not the case for employers in category 4: your company will therefore probably have to limit itself to the proportion of time actually spent on the R&D project – and justify this.
- The calculation: Note also that the ceiling applied to bachelor’s degree holders (25%) is doubled for “small businesses” (according to the NBB definition, i.e. who employ less than 50 workers per year on average, and have a turnover of less than €9,000,000 excluding VAT and a balance sheet total of no more than €4,500,000).
- A duty to declare: Finally, while companies are required to declare their R&D projects or programmes to BELSPO (the Federal Public Service for Science Policy Programming), universities, colleges, approved scientific institutions and other non-profit organisations are exempt from this.
HOW DO YOU FIND WHERE YOU STAND?
This is the question! Indeed, your standing will largely affect your tax situation, and maximising the benefit resulting from the partial exemption from payment of withholding tax can be a long and technical process. The idea is obviously to take advantage of the present situation, but also (and above all) to create the conditions for an even more fruitful tax future. This requires a high level of expertise, anticipation and preparation. How do you do this? Let’s be honest – it will be difficult to turn your company into a university or to have it accredited as a scientific institution. However, it might fulfil the conditions to place it within the definition of a Young Innovative Company. This is an opportunity not to be overlooked, once you know the more flexible criteria applied to it. If this is not possible, there is nothing to stop you from finding the right partnership with a university or research fund. This too would move you up in the DPP categories. But these are not changes that will happen overnight, and they must take into account your reality and context, as well as the subtleties and changes in regulations. This is why specialised, multidisciplinary, responsible support (“no cure, no pay”) is your best ally in making the most of the financial windfall offered by the DPP.