Specific tax rules apply on income, which is derived by a private person from the cession of the right to use intellectual property, which was created by the individual.

This can, for example, be the case for creations by artists, writers, photographers, designers etc….  The related income is (up to an annual limit) taxed at a reduced fixed rate of 15% (plus communal tax) and in order to determine the amount of the taxable income a substantial cost deduction is granted. In addition, this type of income is not subject to social security contributions.

The reduced taxation, in combination to the social security exemption, strongly contrast with the high income tax and social security rates, which apply on regular income from professional activities.

Tax payers obviously have an interest to maximise income from intellectual property sources as compared to regular professional income. It appears, however, not always to be easy to draw the line between both types of income. This leads to uncertainty with the tax payers and a risk for high back charges of tax in case of a tax audit. For the revenue, there is the fear that tax payers will try to convert regular professional income into income from intellectual property in order to reduce their taxes.

On  5 September 2014  a tax circular letter was issued on this matter. Quite strangely, the circular letter was already cancelled a few days later (on September 9) and the matter is under renewed investigation by the tax authorities. Nevertheless, it can be interesting to have a look at the contents of the ‘old circular’ letter. According to the Minister of Finance, the following elements are of importance:

1. Does the intellectual creation meet all conditions to be able to generate the type of revenues, which may be taxed at the lower rate?
2. Is the revenue, which is paid out, actually resulting from the use of the intellectual creation?

The basis for the qualification of the income for tax purposes is to be found in the documents (such as agreements, invoices, purchase orders, etc…), which are made up between the individual and the users of his creations or professional services.

A high importance was given in the tax circular letter to the agreement between the parties and to the definition of the revenue in such agreement. This is quite logical as in the absence of an agreement, it may be quite difficult to determine the intention of the parties and the related tax consequences.

According to the authorities, the fact that elements exist, which indicate the existence of a cession or exploitation of intellectual rights does not automatically imply that any income will be taxed according to the most favourable tax regime. In case various types of income exist, the basis for the distinction between them will have to be found in the agreement between the parties.

The tax authorities even point out that in the absence of the definition in the agreement of the (part of) income, which is related to the intellectual property, they will conclude that there is no payment at all for the use of the intellectual property and that all income is consequently to be taxed as regular professional income (at the highest rates).

When applying these principles, the following situations appear to be possible:

1. The agreement makes a distinction between regular professional income and the payment for the use of the intellectual creations. In the initial circular letter, it was mentioned that the division between both types of income, as made in the agreement, would be applied for tax purposes. This does not seem to be very realistic as the parties may be induced to over allocate income to the intellectual property and underestimate the income for other professional activities. One may expect that the tax authorities will have to adjust their opinion on this matter. At the same time, tax payers should not lose their sense of realism and ensure that the remuneration for the use of the intellectual right at all times reflects normal market practices.
2. If the agreement mentions an overall remuneration without separately defining the part, which relates to the intellectual property, the authorities may conclude that no fee is deemed to have been agreed for the use of the intellectual property (and all income may in the end be taxed at normal progressive rates).
3. If the agreement only relates to the use of intellectual property, the total income will be taxed accordingly. This situation is obviously limited to cases where there is only one type of activity and that there is no mix between the two income types.
4. If the activities of the individual imply the presence of intellectual rights, but if the agreement does not define these and does not define the related payments, all income is likely to still be taxed at the regular progressive rates.

One can therefore conclude that it will now be of the greatest importance to review the agreement between the parties and to properly define the revenue, which relates to regular professional activities and the revenue, which relates to the use of the intellectual property. Awaiting further interpretations from the tax authorities, it is prudent for the parties to ensure that the distinction between the revenue types can at all time be properly justified.