Tax incentives for creativity: under what conditions can you, as a business director, receive copyright royalties from your company?

Since 2008, your professional income derived from the exploitation of copyright-protected works, including computer programmes, has been eligible for favourable tax treatment. As the legislator provides little in the way of specific guidance on this matter, the government fills this broad legal framework by means of circulars (so-called ‘circulaires’). These are guidelines intended for the tax authorities, essentially a form of quasi-legislation. As these supplementary rules of application still leave room for interpretation, it is not possible to predict with certainty how the tax authorities will assess your specific case. To get a feel for this, you can enter into dialogue with the Advance Rulings Service at the Federal Public Service Finance, known simply as the ‘ruling service’. There are two possible procedures: a pre-filing and a ruling. The first procedure results in a (non-binding) advisory opinion, which can even be submitted by your legal adviser or specialist accountant on the basis of an anonymised file. A ruling application, on the other hand, aims to obtain definitive certainty in the form of a binding agreement with the tax authorities. Over the years, a now familiar set of criteria has emerged from rulings concerning income from the assignment or licensing of copyright, neighbouring rights and statutory/compulsory licences. Here, we outline the factors you need to take into account.

A primary requirement for the application is the creation of a work protected by copyright: in other words, the work produced results in an original work. This does not necessarily have to be a literary or artistic work¹ such as a drawing, text or the graphic design of a website or interface, but also includes the source code of a computer programme, including the preparatory design material leading to its creation.

In summary:

Legal basis:
Article 17(1)(5) of the Income Tax Code 1992 (“WIB 92”), introduced by the Act of 16 July 2008.

Income covered:
remuneration from the transfer of copyright in protected works, including computer programmes.

Tax treatment:
taxed as income from movable property with a withholding tax of 15% up to a ceiling of 61,200 euros, with a generous flat-rate deduction for expenses.

For some time now, the ruling service has required a written agreement for the transfer of property rights, setting out a clearly defined fee. This means that income is derived from that (con)cession. If the transfer is free of charge, this logically precludes the payment of any transfer fee. To clarify: this applies to assignment, concession or licence fees arising from a (con)cession agreement, as well as income from statutory licences. To remove any uncertainty, it is advisable to take the statutory requirements into account when carrying out such a written transfer. The law stipulates that, for every form of exploitation, the remuneration, scope and duration must be expressly determined. Note that the rules for employees and directors, as well as for commissions in the non-cultural sector (e.g. in the advertising sector), are more flexible.

What amount can now be paid out as copyright income? The statutory upper limit for separately taxable income from movable property is capped at 37,500 euros per annum, which, after indexation (2020 tax year), amounts to 61,200 euros. Costs may be deducted from this amount, either on an actual or a flat-rate basis. If you deduct actual costs, you must be able to provide evidence of them. With a flat-rate deduction, you do not need to provide any evidence, and 50 per cent is automatically deducted from the first bracket, and 25 per cent from the second bracket.

As with all tax matters, the royalty payment is assessed against the general anti-abuse provision. The royalty payment must be in line with market conditions and reasonable, and must therefore not constitute tax abuse. The burden of proof, as is customary, lies with the taxpayer.

What if your income comes through your company, and you (as a director) wish to pay yourself royalties under the tax-favourable scheme?
There are two possible ways to receive royalty payments from your company. The first is to allocate a percentage of your remuneration, including benefits (the so-called ‘financial envelope’), as copyright remuneration. A second method is the payment of a predetermined percentage of turnover as royalty remuneration. As will become apparent, the turnover-related approach is by far the most complicated.

Two options

1. A percentage of the financial envelope (your company remuneration including benefits) which is paid out to you.

2. A percentage of your company’s turnover

In this regard, we must take into account a considerable number of restrictions (‘caps’), which we saw increase (once again) in two rulings of 7 May 2019. These caps are intended to ensure that you do not pay yourself any director’s fees – which are unreasonable from the company’s perspective – that you would not pay to a third party (the ‘arm’s length’ criterion).

It is essential that your AR remuneration is paid in addition to normal performance-related remuneration and does not result in a reduction thereof. Furthermore, the remuneration must not result in less than half of what your company receives from its clients through the transfer of copyright – referred to here as ‘AR turnover’ for simplicity’s sake – remaining within the company. In other words, and this is the first cap: a maximum of 50 per cent of the company’s net AR turnover (i.e. excluding VAT) may be paid to the managing director as AR remuneration (i.e. income from movable property). Furthermore, as a second cap, this remuneration may not exceed half of the company’s (overall) profit for the financial year, before tax and before the deduction of copyright royalties.

However, there is also a safety net: the aforementioned restrictions must not result in the remuneration granted amounting to less than 5 per cent of the net creative turnover, that is, the turnover (excluding VAT) arising from the types of assignments that give rise to the creation of copyright-protected works (including computer programmes). This ‘floor’ was incorporated by the ruling service to ensure that creativity is rewarded to at least some extent.

When attributing income from movable property, we must also take into account the performance-related remuneration you receive as a company director. This must not fall below the reference amount. If that remuneration amounts to less than €45,000, the AR allowance must in any case be limited to 5 per cent of the company’s aforementioned net creative turnover from the exploitation of the works in question. Furthermore, if there are several managing directors, that percentage must be reduced proportionally.

As indicated earlier, provided that the volume of the managing director’s work remains unchanged, the remuneration may not, in principle, be reduced as a result of the transfer of copyright. To clarify: this also takes into account taxable benefits of any kind, which means that these too may not be reduced.

The portion of the remuneration that covers the company director’s expenses (travel, administration, reimbursement of costs for the use of their own materials and equipment, etc.) is not included in the company’s creative turnover. Furthermore, the remuneration must be reduced by the remuneration for the transfer of copyright granted to employees, freelancers and self-employed subcontractors.

From the company’s perspective, in order for the copyright remuneration paid to be deductible, it must constitute an expense incurred to obtain or retain taxable benefits. Regarding its deductibility in light of whether or not the acquired copyright is of a permanent nature for the business activity, the following observation applies. In a controversial circular, the tax authorities have issued guidance on copyright acquired for long-term use in the course of business. Copyrights acquired that are of a permanent nature must be recognised as intangible fixed assets on the assets side of the company’s balance sheet. Consequently, the copyright cannot be written off in a single instalment or on a declining balance basis; the write-off must be spread over at least five years. If this long-term nature is absent – which is the case where intellectual property is transferred to the customer almost immediately – then the cost may be written off in a single instalment.

But there is more. The rulings of 7 May 2019 cited above introduce yet another new cap. More specifically, this applies to cases where it is not solely the managing director’s work that generates so-called ‘creative turnover’. The decision states in this regard: “In any event, and taking into account the circumstances described, the copyright royalty payable to any company director, calculated on the basis of the turnover for a specific year, shall not exceed twice the average of the copyright royalties received by current and future employees, freelancers and self-employed subcontractors during the course of the same year for the assignment of their copyright. This applies as soon as at least one creative full-time equivalent (employee + freelancer + self-employed subcontractor) provides services for which copyright remuneration is granted”. The ruling service also provides the following example: “Suppose that the average of the copyright royalties paid to employees, self-employed collaborators, and so on, over the course of the year is equal to 4,500 EUR; in that case, the ‘maximum copyright royalty’ to which each company director (calculated on the basis of that year’s turnover) is entitled to may not exceed €4,500 x 2 = €9,000”.

All the caps mentioned mean that turnover-related income from movable assets (the second method) has to pass through an increasing number of filters before it reaches the business manager. The question is how attractive this formula still is, and whether the first method (a percentage of the ‘financial envelope’) might therefore be preferable. With this latter remuneration method, we do not need to take these complex caps into account. However, this latter method is a more static approach, which therefore does not result in a higher AR remuneration in a financial year with exceptional AR turnover.

It is clear that the Ruling Service’s interpretation of the 2008 legislation is constantly evolving and is resulting in increasingly complex rules. This raises the legal-philosophical question of whether legal certainty requires more detailed legislation, or whether those subject to the law are better served by a legal framework that can be interpreted by the authorities in line with the specific circumstances. In any case, we see that this form of tax optimisation is being applied on an increasingly widespread basis. For instance, the copyright royalties declared to the tax authorities have increased tenfold in seven years to over 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.