In execution of the budget negotiations within the federal government, a draft bill reforming this favorable income tax regime was published on 24 November. This reform must be seen in the broader context of the reform of the personal income tax. Meanwhile the Council of Ministers approved a draft royal decree reforming copyright in the field of social security. If adopted, the new rules will have an enormous impact in many sectors. Below, we reflect on the implications of these proposed changes.
Current income tax treatment of royalties/copyright income
Under the current regime as established in 2008, an individual who transfers or licenses copyrights or related rights in exchange for a remuneration can benefit from a favorable tax regime.
The remuneration received in exchange for the transfer or licensing of the copyrights qualifies as movable income which is taxed at a separate tax rate of 15% for a maximum amount of 64.070 EUR (indexed amount for assessment year 2023). The remuneration exceeding this threshold will be treated as professional income and taxed at progressive rates.
Since the taxable basis is calculated by deducting lump sum expenses (i.e. 50% on the first 17.090 EUR tranche, 25% on the second tranche from 17.090,01 to 34.170 EUR and 0% above this amount), the effective tax rate is even further lowered to approx. 7,5-12%.
In case of a transfer or license of copyright or related rights by company managers, the remuneration should distinguish between the remuneration for the services rendered and the remuneration for the transfer or license of the copyright or related right.
This favorable tax regime allows employers to optimize the salary package and to attract creative profiles and is frequently used by software developers, designers, photographers, journalists, architects, etc.
Current social security treatment of royalties/copyright income
Belgian social security authorities argue that royalties granted by employers are subject to social contributions if (a) the beneficiary is bound by an employment contract with the employer concerned and (b) it has been contractually agreed that the royalties are granted as a consideration for work performed.
The Belgian Supreme Court has confirmed the position of the social security authorities by ruling that royalties awarded by an employer constitute a consideration for work performed. Therefore, royalties form part of the salary based on which social security contributions are calculated.
Since the Supreme Court explicitly refers to copyright and related rights transferred upon conclusion of the employment contract, there might still be room for discussion regarding royalties generated from copyright and related rights transferred after signing the employment contract.
Company managers are not required to pay social contributions with regard to the copyright income in their capacity of self-employed persons since it does not constitute professional income. In case of exceeding the mentioned threshold of 64.070 EUR, contributions will have to be paid on the income surpassing this threshold.
What changes are being proposed to the tax and social security regime of royalties/copyright income?
In recent years, the favorable tax regime has been increasingly applied and has developed into a full-fledged method of remuneration in many sectors that, according to the legislator, are sometimes far from its original objective. With this draft, the legislator thus wishes to return to the original purpose of the regime, being a tax regime applicable to income obtained in an irregular and variable manner in the context of artistic activities considering the 'ability to pay' of the beneficiary of the remuneration.
For income tax purposes, a draft bill introduces following restrictions as of assessment year 2024 (income year 2023):
- The scope of the favorable regime will be restricted to the income derived from the transfer or licensing by the original right holder, his heirs or legatees, of copyrights and related rights which relate to original works of literary or artistic works with a view to the exploitation or actual use of these rights (except force majeure) provided that:
- the original right holder has a work of art certificate or, in the absence thereof,
- the right holder transfers or licenses those rights to a third party for communication to the public, for public performance or execution, or for reproduction.
- The qualification as movable income will be supplemented by a second threshold: the remuneration received in exchange for the transfer or licensing of the copyrights qualifies as movable income insofar it (i) does not exceed the absolute threshold of 64.070 EUR and (ii) if services are provided, the ratio of the remuneration for the transfer or licensing of the rights and the total remuneration, which includes the fees for the services provided, does not exceed the relative threshold of 30% (as of assessment year 2026; for assessment year 2024 and 2025 the threshold equals 50% and 40% respectively). In practice, the relative threshold was already often applied in employment contracts.
Example: The total remuneration for providing services and for the transfer or copyright amounts to 75.000 EUR. According to the contract, an amount of 45.000 EUR relates to the transfer of the copyright. Since this amount exceeds 30% of the total remuneration, only an amount of 22.500 EUR (30% of 75.000) will benefit from the favorable tax regime and an amount of 52.500 EUR will be taxed as professional income.
If the remuneration for the transfer or licensing of copyrights or related rights is a relatively high amount that is received on a regular basis, the irregular and variable character of the income and the ability to pay principle is no longer a justification for applying the special regime. The legislator therefore introduces a further rule according to which the qualification as movable income only applies if the average remuneration for the transfer or license of these rights received during the previous four taxable periods (without taking into account the aforementioned thresholds) does not exceed the absolute threshold of 64.070 EUR.
Example: the gross remuneration for the transfer of copyrights or related rights amount to 40.000 EUR during income year 2023. The gross remuneration amounted to respectively 100.000 EUR, 70.000 EUR, 50.000 EUR and 60.000 EUR during income years 2019-2022. Since the average remuneration in the four preceding years amounts to 70.000 EUR (which exceeds the absolute threshold amount), the favorable tax regime does not apply for income year 2023 and the remuneration of 40.000 EUR will entirely be taxed as professional income.
- Finally, the legislator explicitly includes the concept of copyright and related rights in the Belgian General Anti Abuse Rule to prevent transfer of rights to non-residents who benefit from a (more) favorable tax regime.
In the field of social security, the draft royal decree envisages the following changes:
- During the period of the four quarters of the calendar year, the remuneration for the transfer or licensing of copyright and related rights may not exceed 30% of the sum of:
(1) The total amount of wages subject to social security contributions to which the employee is entitled; and
(2) The total amount of the remuneration granted for the transfer or licensing of copyright and related rights.
- Both the salary and the remuneration for the transfer or licensing of the rights must be determined in accordance with market conditions. The employer shall keep evidence of the various elements of assessment available.
- The amount of the remuneration is stated in the quarterly declaration to the National Social Security Office of the quarter in which the remuneration is granted.
What does this mean for persons applying this favorable copyright income tax system?
The new tax rules enter into force as of 1 January 2023 and apply to remunerations paid as of that date, although transitional measures are introduced for existing situations. These measures imply that taxpayers that currently benefit from the favorable regime but will not anymore fall into the scope of the regime due to these amendments may still apply the regime for income year 2023 (assessment year 2024) taking into account the following:
- The absolute threshold of 64.070 EUR is reduced by half;
- The brackets for the lump sum expenses (i.e. currently 17.090 EUR for the first tranche and 34.170 EUR for the second tranche) are also reduced by half.
At present, the impact of these new rules remains doubtful. Whereas it is clear that for example novelists, scenarists and composers remain able to apply the favorable tax regime, the impact for certain software developers is currently unclear.
Many rulings have been concluded in the past by taxpayers in various sectors in which the application of the favorable regime was confirmed. If these rulings do not remain valid, taxpayers may want to seek alternatives.
In case employees will no longer be entitled to the favorable regime because of the reform, employers cannot, of course, be held liable for any negative impact on their net income. In some cases, employers may choose to mitigate these effects through alternatives within the legal boundaries of the wage margin.
Should you require any assistance in this respect, please do not hesitate to contact us.