Reform of the copyright transfer tax scheme for individuals: Un compromis à la Belge?
On 22 December 2022, the Belgian Parliament approved a bill containing the 2023-2024 federal budget and the tax measures that were announced in this context. We briefly outlined some of these tax measures in a previous tax alert.
One of the measures included in this bill is the reform of the copyright transfer tax scheme for individuals which was widely applied by taxpayers in various sectors. The reform of this scheme and particularly the limitation of the personal and material scope of the scheme have caused great public concern (e.g. from the technology sector), prompting numerous discussions on a political level. The political consensus that was ultimately achieved is ambiguous and leaves the taxpayers with more questions than answers.
In this tax alert we discuss the most intrusive changes to the copyright transfer tax scheme.
Current copyright transfer tax regime
Belgian tax law provides for a favourable tax treatment of copyright fees paid to an employee or self-employed individual, as compensation for the transfer of copyrights to the employer or client. Under this tax scheme, these fees (capped at EUR64,070 for income year 2022) are generally subject to an income tax rate of 15%, whereas the normal personal income tax rate for professional income exceeding approx. EUR42,000 is 50% (to be increased by municipal taxes). In addition, a 50% lump sum cost deduction can be applied to the first income band of copyright transfer fees of EUR0 to EUR17,090 (income year 2022) and a 25% lump sum cost deduction can be applied to the second income band of copyright transfer fees of EUR17,090 to EUR34,170. No lump sum deduction can be applied on the amount exceeding EUR34,170.
Over the years, this tax scheme has been widely applied in different sectors, such as by IT- and software developers, architects, lawyers, etc. This widespread use is not in line with the rationale of the legislator in 2008, which was to entitle only a limited amount of “creative” professions (mainly in the artistic world) to the copyright transfer tax scheme.
In this context, the Belgian federal government has announced its intention to align the personal scope of this tax scheme with the initial rationale of the legislator.
Limitation of the personal scope
The current copyright transfer tax scheme is applicable to “copyright-protected work” in general. This concept must be interpreted broadly, in a way that it covers not only books, art or graphic designs, but also computer programs and source codes of a certain complexity. It was sufficient that the work was “original”, in the sense that it was the author's own intellectual creation.
As such, the relevant conditions under the current rules did not require a specific personal capacity to be entitled to the tax scheme, other than the requirement to be the author of the relevant work.
Under the new rules, the legislator has introduced a stricter personal scope. Now, the original author must hold a work of art certificate, or the rights holder must transfer the IP rights or grant a license for the purpose of “public communications, public performance or reproduction”. In this way, the legislator intends to align the scope with the initial legal rationale of the tax scheme.
As the concepts “public communications, public performance or reproduction” are relatively broad and play a crucial role in the personal scope, it’s expected that they will lead to various discussions between taxpayers and the tax administration. A strict interpretation of this condition might result in adverse consequences for practitioners in different sectors (especially architects, software developers, etc.).
Indirect limitation of the material scope: exclusion of software as qualifying “copyright-protected work”?
To further align the scope of the copyright transfer tax scheme with the initial rationale of the legislator and to collect additional tax revenue, the Belgian federal government had the ambition to exclude software from the material scope of the copyright transfer tax scheme.
Even though the new rules do not explicitly exclude software as a qualifying “copyright-protected work”, the Minister of Finance indirectly declared in a Parliamentary commission that this bill should be interpreted in such a way that software is excluded from the material scope. During a succeeding discussion on the software exclusion in the plenary meeting of the Parliament, the Minister of Finance indicated rather cryptically that the explanatory memorandum of the bill does not stipulate a “restrictive interpretation”.
It is unclear whether the Minister of Finance intended to confirm that the scope of the new tax scheme should be interpreted broadly, so that software is not a priori excluded. This would make sense, as it could be argued that the position of the Minister of Finance on the exclusion of software is not in line with the wording of the applicable national and international rules. Further, an a priori and explicit exclusion of a sector might also infringe the principle of non-discrimination.
In any event, it can be expected that the Belgian tax administration will adopt a similar (strict) position based on the statements of the Minister of Finance in the Parliamentary commission. Further, tax practitioners look forward to the position of the ruling commission on the application of the reformed tax scheme in respect of software.
Limitation of the calculation of the tax benefit
If the copyright-protected work and its author fall within the material and personal scope of the reformed tax scheme, the author can in principle claim the application. However, the income stemming from the transfer of the copyrights will only be eligible to the extent that:
- The “absolute” cap of EUR64,070 for income year 2022 is not exceeded. The part of the income exceeding this cap will not be considered as qualifying income for this tax scheme.
This cap already was already applicable under the current rules.
- The ratio between the compensation for the transfer of copyrights and the total compensation for the entire performance does not exceed 30%. The remaining 70% of the total compensation will lose the qualification of movable income and will be taxed as professional income (at the progressive income tax rates). The 30/70 ratio only applies as of assessment year 2026. For assessment year 2024 and 2025 the applicable ratios are 50/50 and 40/60 respectively.
This “relative” cap is a new “anti-abuse” rule to avoid disproportionate amounts of copyright transfer fees. Note that this condition is only applicable in case the fees received compensate the transfer of the copyright and the work that has been rendered. This rule is thus not applicable if the fee only compensates the transfer of copyrights. It is at this point not entirely clear how this exception will be interpreted and applied in practice.
- The annual average gross copyright transfer income realized during the previous four taxable periods does not exceed the maximum of EUR64,070 for income year 2022. If this cap is exceeded, the total amount of the copyright transfer fees is deemed to be professional income and will thus be subject to the ordinary progressive income tax rates (including the part of the income that does not exceed this average).
In income year 2023 an individual generated EUR80,000 gross copyright transfer fees.
The gross fees realized by this individual in the previous four taxable periods respectively amounted to EUR50,000, EUR70,000, EUR45,000 and EUR65,000. The average gross income for the four taxable periods prior to 2023 thus amounts to EUR57,500, which is less than EUR64,070.
In case the average gross income exceeded EUR64,070, the total amount of the gross copyright transfer fees amounting to EUR80,000 would be deemed to be professional income.
Social security exemption for employees
Under the current rules, for employees, the copyright transfer fees that were eligible for the tax scheme were generally subject to the ordinary social security contributions due by the employer and the employee.
This will change under the new tax scheme, as a royal decree will be introduced that provides for a possible exemption from social security contributions of these fees realized by employees. The scope of the tax and social security scheme will be aligned. The potential implications of the application should be assessed in detail on a case-by-case basis.
For self-employed individuals, no social security contributions should be due on the copyright transfer fees that are eligible for the tax scheme. After all, this income is deemed to be movable income, whereas social security contributions are calculated based on their professional taxable income.
Entry into force and transition period
The reformed copyright transfer tax regime will apply as of assessment year 2024 (income year 2023).
To mitigate any short-notice adverse tax consequences, the bill provides for a transitionary rule for taxpayers that applied the current tax scheme in assessment year 2023 (income year 2022) but are excluded from the scope of the reformed scheme. These taxpayers can still apply the current tax scheme during assessment year 2024 (income year 2023). It should however be noted that all the aforementioned limitations will apply and the absolute cap and the scales for the lump sum deductible professional costs are reduced by 50%.
Belgium has reformed its attractive and favourable copyright transfer tax scheme, and the potential adverse consequences may be far-reaching for employers, employees and self-employed individuals in various sectors, and in particular for software developers, architects, consultants, marketeers, etc.
In the past, many rulings have been issued on the application of the current copyright transfer tax scheme. Following the introduction of the reform and depending on the elements of each specific case, these rulings might no longer be valid as of income year 2023.
Taxpayers who are currently either applying the copyright transfer tax scheme or paying eligible copyright transfer fees should carefully assess their status under the reformed copyright transfer tax scheme. In case they are not entitled to apply the reformed scheme, a transitional period might be applicable for income year 2023, provided that certain conditions are met. In addition, employers may also face higher salary costs following the introduction of this reform. These employers may explore alternatives to reduce their labour burden (e.g. the partial exemption from payment of the wage withholding taxes for R&D personnel).
Finally, employers who are not negatively affected by this reform may consider applying the social security exemption for the copyright transfer fees that are paid to their employees as of 2023. This should be assessed on a case-by-case basis.
As DLA Piper has closely followed these developments, we are able to assess the risks for your business and assist you with adapting to the new situation under the reformed copyright transfer tax scheme.
For more information on the federal budget for 2023 and 2024, the measures that have been adopted and the possible impact, please contact the authors or your usual contact at DLA Piper.