Tax saving opportunity through qualification of income from software copyright transfer/license
Deloitte Belgium Tax Quarterly, Issue 44 - June 2011
When IP and Tax law are converging
The law of 16 July 2008, which is applicable as of 1 January 2008, amends article 17 of the Belgian Income Tax Code (BITC) by adding a “5°” subsection. This states that “income arising from the transfer or license of copyright and related rights as well as legal or compulsory licenses under the law of 30 June 1994 regarding these same rights or similar provisions of foreign law” can be qualified as movable income.
By adding this subsection, the legislator aimed to stop the never ending discussion regarding the qualification of income derived from activities as an author.
Recall that, as stated in this law, although rights which generate income are exercised through professional activity, income generated by the transfer or licensing of these rights remains qualified as personal income until a capped amount of 37,500 EUR (to be indexed). A flat tax rate of 15% is applied on the income received below this level and a final withholding is applied. Above this threshold, the remuneration will be qualified as professional income and taxed at progressive tax rates going up to 50% (to be increased with the communal charges). A lump-sum amount of expenses can be deducted by up to 50% for the first EUR 10,000 (to be indexed) and up to 25% between EUR 10,000 and EUR 20,000 (to be indexed). Where the tax payer can prove actual charges exceeding the lump-sum amount, he will be authorised to deduct them.
This particularly attractive measure is mainly applied in the cultural sector, in media, paper and television journalism.
"In principle, the physical
or moral person or the group
of physical persons who
developed the computer
program own the copyright"
Computer programs are protected by another law of 30 June 1994 which departs from or completes the law of 30 June 1994 on copyright or related rights. The question has risen whether this tax legislation would also be applicable for the remuneration paid for the transfer or license of software rights targeted by the specific law of 30 June 1994, which has been introduced in order to implement the European directive of 14 May 1991 (91/250/CEE) in Belgian legislation.
On 4 May 2011, in replying to a parliamentary question, the Minister of Finance clearly indicated that although fiscal law does not refer explicitly to the law of 30 June 1994 (of the same date) which incorporates the European directive of 14 May 1991 concerning the legal protection of computer programs into Belgian law, it does not exclude it from its scope of application. Excluding income specifically gained from the transfer or licensing of computer program rights from the set of income targeted in article 17, §1, 5° of the BITC 92 would be, according to the Minister of Finance, “unjustified and indeed discriminatory”.
Application in practice...
The law of 16 July 2008 is expressly focussing on the law of 30 June 1994 regarding copyright protection. As mentioned, according to the Minister of Finance, fiscal law also refers to copyright protection for computer software.
Three rulings have been published to date, from which one may conclude that the following three criteria are being looked at in order to assess how this legislation can be applied in practice:
- Is the creation considered as “protected work” as foreseen in the scope of the new law? In order to be seen as such, a creation needs to be original, expressed in a certain format, which enables its communication towards the public and must be branded.
- Is a distinction made between the remuneration of the authors’ work and the amount granted related to the transfer of copyright or related rights to a third party?
- Is the amount determined and paid consequently to the copyright transfer?
The ruling commission has pronounced its decision taking into account the specific sector of media. But can one conclude that software designers can also benefit from this fiscal measure?
In other words, can it be considered that a software company planning to hire a new software developer may suggest rewarding the developer’s creative work from the transfer or licence of copyright?
...and points of attention
1. From a tax perspective, the Minister of Finance has confirmed that the tax regime foreseen for the transfer or license of copyright is applicable for the remuneration received as a software designer.
Although this regime may be a good alternative for IT companies having employees involved in R&D activities, albeit without adequate qualifications (for example IT bachelor) allowing the benefit of the payroll tax exemption, it is advisable to request a tax ruling in order to consider part of the remuneration of software designers as copyright.
2. Another question which may arise is linked to the social security treatment of the income arising from the transfer or license of copyright and related rights.
Through another answer to a parliamentary question, the Minister of Finance was able to reiterate that the law of 16 July 2008 does not aim to change income constituting remuneration for salaried workers or profit from liberal professions into copyright.
The National Social Security Office does not consider the rights targeted by the law of 30 June 1994 to be in line with the definition of remuneration exempt from social security contributions. Copyrights are linked to moral and patrimonial rights holders’ protection vis-à-vis the conceived work. Agreements between the transferor and transferee should clearly ascertain that paid sums are copyright duties and not pay for work performed under an employment contract. A distinction between remuneration provided for contractual services rendered and remuneration provided for copyright transfer has to be clarified.
This entails the drafting of the necessary agreements specifying the remuneration granted for the work performed (professional income) and the one related to copyright transfer.
3. Two branches constitute copyright law: one is linked to the economic nature of the work’s operation (patrimonial rights), the other mainly relates to the creator’s personality (moral rights):
- Patrimonial rights comprise the licensing rights, meaning the right to promote the work to the public and the right to reproduce while respecting the physical elements of the work;
- Moral rights are constituted by right of publication, right of withdrawal, right of attribution and the right to the respect of the work’s integrity.
The law of 30 June 1994 mandates that the employer is the presumed beneficiary of the patrimonial rights relating to computer programs developed by one or more employees or agents performing their functions. However, the two parties (being the company and the employee) can contractually state otherwise.
"...one should interpret and
apply fiscal law with caution,
since many questions may
arise from a paragraph
inserted in the tax code"
In principle, the physical or moral person or the group of physical persons who developed the computer program own the copyright. I.T. programs, as with databases, undergo a different legal treatment: the lawmaker foresees that, unless contractually or statutorily expressed, the employer is presumed transferee of the patrimonial rights associated to computer programs conceived by one or more employees or agents operating under employer’s instructions.
The moral right conforms to article 6bis, 1 of the Berne convention which stipulates that, independently of the author’s patrimonial rights and even after the transfer of said rights, the author retains the right to claim ownership and reject all modifications to the work or any threat to its honour or reputation.
Therefore, when applying this fiscal legislation, the evaluation of the rights should also be considered. How can we evaluate the author’s right and apply the correct indicators? This question goes beyond the traditional tax questions. However, the answer to this question is crucial when trying to reward the creation.
As indicated, further to recent clarification brought by the Minister of Finance, this tax incentive should be carefully considered by the Belgian software industry, particularly the companies who have not been able to apply the wage tax reduction for R&D employees. In any case, one should interpret and apply the fiscal law with caution, since many questions may arise from a paragraph inserted in the tax code.