Under certain conditions, Belgian taxpayers can benefit from a very favourable tax regime for personal income resulting from the transfer or assignment of copyrights. Although this was initially only intended for the cultural sector and for income generated within a more ‘artistic’ context (e.g. for architects, graphic designers, journalists, etc.), it has nowadays become a widespread form of remuneration.
Basically, any type of creation can benefit from copyright protection and is therefore eligible for this type of compensation. This is the case if the work is: (i) ‘original’ (the expression of the author’s personal intellectual creation), and (ii) ‘materialized’ in a concrete, visible or audible form.
Copyright compensation can be paid out by a publisher or production company, but also by your own management company. As long as you are the author of some type of copyrighted work (e.g. software, PowerPoint presentation, brochure, plan, model, etc.), any director or manager who provides services through their own management company can potentially benefit from this royalty tax scheme. Even salary packages of employees now often include a royalty payment.
While normal professional earnings like salary are subject to the standard progressive tax rates (from 25% up to 50%), plus social security, this type of income is classified as ‘movable’ income up to €62,550 (tax year 2022), which is taxed at only 15%. In addition to this low tax rate, taxpayers are allowed to deduct a lump-sum business expense allowance of up to €12,510 from their taxable royalty income.
Considering the significant difference in tax liability, the Belgian tax authorities have recently launched a general investigation into the improper use of royalty payments. Logically, some authors have replaced (part of) their salary with a copyright compensation to be taxed less heavily and to further reduce their social security contributions. A royalty is also fully tax deductible for the company making the payment, while a dividend is not. This is obviously a thorn in the taxman’s eye. As a result, the authorities have been sending questions for information to taxpayers who have declared copyright compensation in their personal tax return in recent years.
The authorities use a lengthy questionnaire which requires quite a lot of feedback from the taxpayer. If you do not reply within one month, the tax authorities can fine you and, so to speak, tax you ex officio, which shifts the burden of proof to the taxpayer. In that case the authorities might tax the royalties as salary instead and then it is up to the taxpayer to prove the contrary.
The tax office is asking for the following information:
1. a detailed description of the company’s activities;
2. an overview of the company’s total turn-over and turn-over related to licensing;
3. a copy of the license agreement(s) agreed to by the company or any other relevant document that justifies the transfer/assignment of exploitation rights;
4. the employment status of each royalty beneficiary (e.g. employee, director, etc.);
5. a detailed description of the licensed work(s);
6. proof that the work(s) are exploited by the company and how this is done in practice;
7. a detailed calculation of the royalty compensation amount(s);
8. demonstrate that the work(s) meet the legal requirements to benefit from a copyright protection;
9. demonstrate per beneficiary for each royalty payment how the amount was subject to withholding tax.
The authorities want to check whether the compensation reported as royalty income can effectively benefit from this beneficial tax regime. This is only the case if the fees have been received for the transfer or assignment of economic rights to works originally created by the taxpayer. This is the reason why the authorities ask to demonstrate that it is only for originally created works (e.g. for texts, drawings, photos, software, etc.) and not, for example, for services provided.
Although a written licensing right agreement is certainly advisable, it is not mandatory. The tax authorities may not refuse the benefit of the royalty tax scheme, simply because you cannot provide a written contract.
In case the taxman has sent you a question for information or in case of a dispute, feel free to contact us, if you would like us to represent you before the tax authorities.