Since 2008, your professional income from the exploitation of copyrighted works has been eligible for favourable tax treatment. Since the legislator provides few concrete guidelines in this respect, the government fills in this broad legal framework by means of circulars. These are guidelines intended for the administrations, essentially a form of pseudo-legislation. Since these additional rules still leave room for interpretation, it’s not predictable with certainty how the tax authorities will assess your specific case. In order to get a feel for it, you can enter into a dialogue with the Preliminary Decisions Service of the Federal Public Service of Finance, or the “ruling service” for short. Two procedures are possible: a prefiling and a ruling. The first procedure results in a (non-binding) advice, which can even be given on the basis of an anonymised file. The purpose of a ruling, on the other hand, is to obtain conclusive security in the form of a binding agreement with the tax authorities.
Over the years, rulings on income from the transfer of copyrights, neighbouring rights and legal/compulsory licenses have resulted in a now familiar set of criteria. We go over what you need to take into account.
Basic conditions for granting copyrights
A first requirement is the creation of a copyright protected work: in other words, the performance delivered results in an original work. This doesn’t necessarily have to be a literary or artistic work such as a drawing, text or the graphic design of a website or interface, but also includes the source code of a computer program, including the preparatory design material leading to its creation.
Article 17, §1, 5°, Income Tax Code 1992, introduced by the law of 16 July 2008.
remuneration for the transfer of copyrights in protected works, including computer programs
taxed as a movable income with a withholding tax of 15% up to a ceiling of 61,200 euros, with a generous flat-rate cost deduction
For some time now, the ruling service has required a written agreement for the transfer of the patrimonial rights, containing a clearly defined consideration. This means that there is income from that transfer. If the transfer is free of charge, this logically precludes the application of the regime. By way of clarification: the income from both contractual copyright assignments and statutory licenses are eligible. In order to remove any uncertainty with respect to the validity of the transfer, it is desirable to take the statutory requirements (Article XI.167 Economic Law Code) into account. Indeed, the law states that for each mode of exploitation remuneration, scope and duration should be explicitly defined. Note that the rules for employees and statutory employees as well as for works for hire in the non-cultural sector (e.g. in advertising) are more flexible.
What amount can now be paid out as copyright? The legal upper limit of separately taxable movable income is limited to 37,500 euros on an annual basis, which after indexation (assessment year 2020) amounts to 61,200 euros. Costs may be deducted, either on a real or on a flat-rate basis. If you deduct real costs, you must be able to prove them. In the case of a fixed cost deduction, you don’t have to prove anything. The first bracket of 10.000 euros (16.320 euros after indexation in assessment year 2020) qualifies for a 50% flat rate deduction, and the second bracket (same amount) for a 25%t rate deduction.
No tax abuse
As in all tax matters, the copyright transfer fee (“royalty”) is assessed in accordance with the general anti-abuse provision. The royalty must be in line with the market and justified, and may therefore not constitute a tax abuse. The burden of proof lies, as we are used to, with the taxpayer.
Additional conditions for company managers
What if your income comes in through your company, and you want to pay yourself (as a manager) a royalty through the fiscally favourable regime?
There are two possible methods to get royalties paid out of your company. The first is the attribution of a percentage of your remuneration including the benefits (the so-called “financial envelope”) as royalty. A second method is the continued payment of a predetermined turnover percentage as royalty. As will become clear, the turnover-related methodology is by far the most complicated one. We have to take into account a considerable number of restrictions (‘caps’), which we saw increase (again) in two rulings of 7 May 2019. These caps are intended to ensure that you do not pay yourself any royalties which are unreasonable from a corporate perspective and thus you would not pay to a third party (the “arm’s length” criterion).
- A percentage of your remuneration including the benefits (the so-called “financial envelope”) as royalty
- continued payment of a predetermined turnover percentage as royalty
We have to take into account a considerable number of restrictions (‘caps’), which we saw increase (again) in two rulings of 7 May 2019. These caps are intended to ensure that you do not pay yourself any royalties which are unreasonable from a corporate perspective and thus you would not pay to a third party (the “arm’s length” criterion).
It is essential that your royalty is on top of a normal performance fee and does not lead to a reduction in it. Furthermore, the royalty may not result in less than half of what your company receives from the transfer of copyrights remaining in the company. In other words, and this is the first cap: a maximum of 50% of the company’s net copyright turnover (i.e. excluding VAT) can be paid to the manager as royalty (i.e. movable income). In addition, the second cap is that this royalty may not exceed half of the (overall) result of the company’s financial year, before tax and before paying out any royalties.
However, there is also a safety net: the aforementioned restrictions may not result in the royalty granted being less than 5% of the turnover (excluding VAT) arising from the types of assignments that give rise to the creation of works protected by copyright, including computer programs (the “net creative turnover”). This floor was built in by the ruling service in order to be able to somehow reward the creativity.
When allocating a movable income, we must also take into account the performance fee that you receive as a manager. This may not be below the reference amount. If that remuneration is less than € 45,000, the royalty must in any event be limited to 5% of the company’s net creative turnover for the exploitation of the works in question. Moreover, if there are several company managers, that percentage must be reduced proportionally.
As indicated above, if the volume in terms of performance of the manager does not change, the remuneration may in principle not be reduced as a result of the transfer of copyrights. By way of clarification, taxable benefits in kind are also taken into account, which means that they should not be reduced either.
The part of the remuneration that covers costs incurred by the manager (relocation, administration, reimbursement of expenses for the use of own materials and utensils, etc.) is not included in the company’s creative turnover. The royalty must also be reduced by the royalties granted to employees, freelancers and self-employed subcontractors.
On the part of the company, in order to be deductible, the paid royalty must be a cost to obtain or maintain taxable benefits. With regard to its deductibility in the light of whether or not the acquired copyrights are permanent for the business activity, the following comment should be made. By means of a controversial circular, the tax authorities have issued a guideline for copyrights that are acquired in order to be used on a lasting basis for the business activity. The acquired copyrights that are of a lasting nature must appear as intangible fixed assets on the assets side of the company balance sheet. As a result, copyright cannot be amortized all at once or degressively; amortization must be spread over at least five years. If this permanence is lacking – which is the case with an almost immediate transfer of the intellectual property to the customer – the cost can be amortized at once.
But there’s more. With the mentioned rulings of 7 May 2019, we see the introduction of another new cap. More specifically in case where it is not only performance of the manager that generates a so-called creative turnover. The decision states in this respect: “In any case, and taking into account the circumstances described, the copyright remuneration of each manager, calculated on the basis of the turnover of a given year, may not exceed twice the average of the copyright remunerations that current and future employees, freelancers and independent subcontractors receive in the course of the same year for the assignment of their copyrights. This applies as soon as at least one creative full-time equivalent (employed employee + freelancer + self-employed subcontractor) provides services for which a copyright remuneration is granted”. The ruling service gives us the following example: “Suppose that the average of the copyright remunerations to employees, freelancers, etc. in the course of the year is equal to EUR 4,500, then the “maximum copyright remuneration” to which the business manager (calculated on the basis of the turnover figure for that year) is entitled may not exceed EUR 4,500 x 2 = EUR 9,000″.
All caps mentioned ensure that the turnover-related movable income (the second method) has to pass through an increasing number of filters before it reaches the manager. The question is how interesting this formula still is, and whether the first method (percentage of the “financial envelope”) is therefore not preferable. With the latter remuneration method, we do not have to take those complex caps into account. However, the latter method is more static, which does not result in a higher royalty in a financial year with exceptional creative turnover.
It is clear that the interpretation given by the ruling service to the legislation of 2008 is constantly evolving and translates into increasingly complex rules. The philosophical legal question arises as to whether legal certainty requires more extensive legislation, or whether a legal framework that can be fleshed out by the administration tailored to the specific situation would be of greater benefit to the legal subject. Either way, we see that this form of tax optimisation is being applied more and more widely. For example, the royalties declared to the tax authorities have increased tenfold in seven years to more than a quarter of a billion euros. It is therefore not inconceivable that this will be a thorn in the side of the next government. But now that the system exists, it is in any case advisable to make use of it if you are entitled to do so. After all, it saves you a lot of money.