Forewarned is forearmed: Legislator introduces adjustments to the R&D wage withholding tax exemption and announces new tax audits

Over the past few years, the Belgian legislator has introduced various tax and parafiscal exemption regimes to reduce high labour costs in some industries. The most important regime is the partial exemption of wage withholding tax related to working overtime, night and shift work, research and development (R&D), sportsmen and mariners. Recently, the legislator introduced adjustments to the exemption of wage withholding tax for R&D. As this measure is widely applied by employers with development activities in IP and IT, we’ll highlight the most relevant adjustments and the elements that often lead to disputes during a tax audit.

The wage withholding tax is initially deducted by the employer from the employees’ wages. Instead of transferring the wage withholding tax to the Belgian State, employers have the right to retain (part of) this wage withholding tax under certain conditions. For employees who perform R&D activities, for example, the exemption amounts to 80% of the retained wage withholding tax. This represents a direct saving on labour costs for the employer amounting to approximately 25% (at least, for the salary representing the R&D working time of the employee).

The R&D wage withholding tax exemption can be applied by all companies employing personnel involved in R&D activities (subject to a few conditions). Qualifying employees could include lab technicians, software developers, and product and process developers. The exemption regime is often applied in the software development sector but could also apply to any other innovative business or department of a larger company (for instance, those who are investing in digitisation projects, environmental projects, investments in automatization, machine learning, digital sales platforms).

This Belgian exemption regime is a great success. Approximately 130,000 employers make use of it and the cost is correspondingly high for the Federal budget. In 2019, the exemption for employees active in R&D represented a cost of EUR1.1 billion.

To limit these costs, the tax legislator has now introduced adjustments to the exemption regime. Below we focus on the most relevant adjustments for the application of the exemption of wage withholding tax for R&D activities. Adjustments have also been made or announced with regard to the exemption of wage withholding tax on overtime and night and shift work. In view of the personal income tax reform, further adjustments could be made to the wage withholding tax exemption regime.

The following adjustments were made to the exemption regime:

• The exempt wage withholding tax can no longer be recorded in the calculation base of the R&D tax credit. The tax credit is a reduction of the corporate income tax which results in a saving of 3-5% on the R&D investment cost (13.5% one-off credit or 20.5% spread credit in proportion to the depreciation on the investments x 25% corporate income tax). By removing the wage withholding tax reduction from the investment value for the tax credit, a double benefit is avoided. This adjustment applies to taxable periods ending on or after 1 April 2022.
• The exempt amount may only be calculated on the legally owed amount of wage withholding tax (e.g. taking into account the family circumstances of the employee). This adjustment applies to remuneration paid or granted as from 1 April 2022.
• The period to file for a refund of wage withholding tax will be shortened from five to four years (and more in particular "three years from 1 January of the year following the assessment year").

In addition, the tax administration continues to frequently audit companies to ensure the correct application of the exemption of the wage withholding tax. These audits often lead to numerous factual disputes and legal uncertainties. The tax administration (supported by case law) shifts the burden of proof entirely on the taxpayer and will therefore reject the exemption if it’s not properly documented and proved.

Based on our experience, the following elements are often disputed during these audits:

• Substantiation of the work time actually spent on R&D: if this is not actively kept up to date (e.g. by means of timesheets or a categorisation of functions), the exemption can be (partially) rejected.
• Notification of the R&D activities to the BELSPO public service: notification is required when applying for the wage withholding tax exemption for R&D and should be updated, together with an accurate description of the company’s R&D projects or programmes, on a yearly basis.
• Technical documentation of the R&D projects or programmes carried out. This documentation must be updated annually and the conformity of the description of the R&D activities as notified to the BELSPO public service must be monitored.
• Diploma requirements: employees for whom the R&D exemption is claimed should meet certain diploma requirements.

DLA Piper's tax team can always assist you with a tax audit focusing on the wage withholding tax exemption. The team has a proactive approach to helping companies prepare for a tax audit and assisting in drafting proper documentation to justify the application of the exemption regime.