Tax and Social Security Optimization based on intellectual property rights received in consideration of the use of an invention.
“Man’s creative activity, His intelligence and his work, have brought profound changes both exchange in the field of science and technology than in our social and cultural life.”
SOCIAL AGENDA, A Collection of Magisterial Texts.
1. IP rights in Belgium
The Act of 16 July 2008 amending the Income Tax Code 1992 (hereafter « ITC») and organizing a flat tax on IP rights operates a real tax reform.
Before this law, the regime of IP rights remained unclear and therefore a source of legal uncertainty.
Revenues from such creative activities could as well be:
- totally exempt from tax and social security contributions on the basis of Article 90, 1 ° ITC (“pater familias type of management activities of private assets consisting of real estate, securities portfolio and movable goods“); or
- taxed at 33 pc as activities revealing a speculative intent but exercised outside of a professional activity; or
- taxed at the marginal rate of 50 pc as professional income and subject to 22 pc of social security contributions!
Legal security is now certain as the law no longer requires anything else then the characterization of the work materialized as “original”.
The law of 30 June 1994 on auteurs’ and related rights (hereafter the “Law” – which was later inserted in the Belgian Code of Economic Law) guarantees a set of legal rights to the creator of an original work, allowing him to enforce the intellectual integrity of his work and to protect its economic exploitation.
The purpose of this IP law is to encourage creativity in mankind and by ensuring those who devote themselves to this activity, that it may become a viable economic activity, even profitable and spread in the public.
Article 1, § 1 of the Act provides that:
“The author of a literary or artistic work has the right to reproduce or authorize reproduction by any means and in any form whatsoever.
This right includes the exclusive right to authorize the adaptation or translation. (…)
The author of a literary or artistic work has the exclusive right of communication to the public by any means.”
The Act provides only for an illustrative list of works.
Article 8. § 1 of the Act defines “literary works” as: “the writings of all kinds, as well as lessons, lectures, speeches, sermons or other oral manifestation of thought.” The “artistic work“, is the “graphical or plastic work such as pictures, collages, paintings, drawings, engravings, prints, lithographs, sculptures, art works, tapestries, ceramics, glassware and photographs, provided they are creations by the artist himself or are copies considered to be original works of art. “Finally, the “database” is ” a collection of works, data or other materials arranged in a systematic or methodical way and individually accessible by electronic or other means.”
Contrary to some misconceptions, the IP rights are therefore in no way confined to the arts and literature and, therefore, the notion of “original work” should be understood broadly.
May thus be protected by IP rights “creations of the human mind, which is conducted in a language or literature or art, which covers the graphic forms of expression, painting, film, photography, music, sculpture or other. ” The literary works are not limited only to works of “literature” in the cultural and aesthetic sense.
The courts have thus characterized as literary works a technical book, a video game manual, a manual or a scientific genetics course.
In order to benefit from the protection of IP law, it is imperative that two conditions are met: 1) it must be original (see point 1.1 below.) and 2) put in a form that reflects the will of the author of the communication (see point 1.2 below).
1.1 The criterion of originality
The concept of originality is not formally defined by the Act and is not the same as what is usually understood in common language.
According to the doctrine and jurisprudence, a work is original if it reflects both the personal stamp of the author and his intellectual effort. This definition is given by the Supreme Court in its judgment of 24 February 1995.
It follows that should not make a confusion between originality on the one hand and novelty on the other.
A work may be original but not necessarily new. The criterion of originality, as defined by the law, is a single and common criterion for all types of works.
This concept of originality in the case law and doctrine is very subjective, especially because of the emergence of new forms of creation. Hence, a technical work (operating manual of a given device, for example) can be considered original if it is possible to consider that its form would have been different if it had been made by a person other than the author.
The work will reflect the personality of its author if it is determined by the artistic choices and if the author could face different opportunities beyond the technical constraints imposed to him.
Since July 2009, the Court of Justice of the European Union, in the judgment Infopaq, defined the criterion of originality as the “intellectual creation of its author.” By that judgment, the Court of Justice has made originality a EU concept, that is to say the same in all Member States of the European Union and applicable to all works.
The words chosen by the Court of Justice are close to a personalist definition of originality. The concept would be subjective. Accordingly, the definition usually given by the Belgian law satisfies the test articulated by the Court of Justice.
Due to its subjective nature and overall, the condition of originality, which is at the discretion of the judge, is easily met.
1.2 The criterion of materialization
It is essential that the creation and / or implementation of an original work is materialized.
It is therefore not the idea, the concept itself that is protected, but the expression, the formalization of this idea.
The original work must be embodied in a concrete, visible or audible form.
The form or expression of the work is therefore the realization of an idea into a form perceptible to the human mind.
An example from the French jurisprudence identifies the limits that this standard requires: if packaging Pont Neuf by Christo is protected by IP rights – the idea of packaging articles is in turn not copyrightable – which led the Court of First Instance of Paris to dismiss the American artist who criticized an advertising agency to use photographs of works of art wrapped in the manner of Christo. The idea of packing structures is not protectable by copyright, as opposed to the realization of this idea in a particular form (the packaging of the Pont Neuf by Christo).
This was confirmed by the Belgian Court of Cassation, which states, in its judgment of 19 March 1998 that “the right belonging exclusively to the author of a literary or artistic work to reproduce or authorize the reproduction thereof in any manner and in any form whatsoever, is not intended to protect an idea or a concept and is no more related to the interests of a company.”
1.3 The test content-container
The test content-container is essential because it applies specifically to databases and not literary or artistic works.
Indeed, the law of 31 August 1998 which transposes the European Directive on the protection of databases under Belgian law establishes a double protection: on the one hand, protection of the IP rights in the container and, from a qualified protection “sui generis” on certain uses of the content.
The IP law part was included in the Act on auteurs’ rights, Articles 20a to 20quater, while the part “sui generis” has been implemented in a separate law.
Article 20bis of the Act states that “databases which, by the selection or arrangement of their contents, constitute the author’s own intellectual creation shall be protected as such by copyright. Protection of databases by copyright does not extend to works, data or material itself and is without prejudice to any right in the works, data or other information contained in the database “.
IP rights thus protect the structure of the database if it is original. Once again, the criterion of originality applies.
Protection by the “sui generis” right is used to prevent extraction and / or reuse of all or a substantial part, evaluated qualitatively or quantitatively, of the contents of the database.
2. The rights of reproduction
The reproduction right is part of the economic rights of the author. The right of reproduction in the broadest sense includes the right of reproduction in the strict sense, the right of adaptation, rental rights and lending the work.
The reproduction right in the strict sense is the exclusive right of the author to authorize or prohibit the reproduction of his work in any material form (book, musical score, film, record, …). Reproduction covers both first reproduction (original reproduction), secondary reproductions (made from the first fixation). This right is set out in Article 1 § 1, paragraph 1 of the Act.
3. Treatment in terms of social security and tax payments of royalties collected
The Belgian social security system is based on the payment of social security contributions on professional income. These payroll taxes are used to finance the Social Security system.
The legal basis for imposing workers in Belgium to social security is the law of 27 JUIN 1969 amending the Decree-Law of 28 December 1944 on social security for workers (hereinafter the “Act”).
The IP rights received cannot therefore be subject to the social security of workers since the law applies only to workers and employers bound by a contract of employment
One should, however, keep a proof required in Article 1a: “§ 1. This Act shall also apply to persons who, without being bound by a contract of employment, provide artistic services and / or produce artistic works against payment of a fee on behalf of the client, person or entity, unless the person providing the performances and / or those artistic works produced no evidence that these services and / or those artistic works are not included in similar socio-economic conditions to those in which a worker is over his employer. However, this provision does not apply when the person providing the service or product artistic work provides this service or product that artistic work in the course of family events.
The natural or legal person that the person providing the service or product artistic artistic work receives remuneration is considered the employer.”
§ 2. By “providing performances and / or the production of artistic works” means the “establishment and / or the execution or interpretation of artistic works in the field of audiovisual and visual arts, music, literature, performance, theater and choreography.
§ 3. The first paragraph does not apply to persons who provide services and / or produce artistic works under the legal entity of which they are the agent within the meaning of Article 2 of the Royal Decree of 19 December 1967 laying General rules for the implementation of the Royal Decree No. 38 of 27 July 1967 regulating the status of self-employed. ”
The IP rights do not represent consideration that are, for the worker, the product of the work for an employer.
An independent worker, unlike an employee, as a self-employed status, and is therefore not bound by a contract of employment status.
The Royal Decree No. 38 of 27 July 1967 organizes the social status of self-employed persones.
Article 3. § 1 provides that: ‘This law applies to any self-employed individual who has a professional activity in Belgium by which he is not involved in the bonds of a contract of employment or an official status. ”
The perception of IP rights does not result from an enterprise, consideration in exchange of professional services.
We also refer to Article 5 of the Royal Decree states: “Journalists, correspondents and people who receive IP rights are not subject to this Law if they already benefit from a social status at least equivalent to that held by this Order. ” Finally, Article 3 provides that ultimately” the persons named as representative or directors in a company or association subject to Belgian corporate income tax or Belgian tax non-residents are presumed irrefutably, to engage in Belgium in an occupation as self-employed.”
3.2. Direct tax – Movable income
From a tax point of view, the question arose regarding the qualification of income from royalties.
These incomes may indeed be characterized as either professional/miscellanous incomes or movable incomes. This issue is crucial in the sense that they are treated as professional income, they are subject to progressive tax rates on income, accumulating to 50% beyond € 40.480 of income for the calendar year 2020, not including the additional county tax.
The Act of 16 July 2008 amending the Code of the Income Tax 1992 and organizing a flat tax on auteurs’ rights and neighboring rights therefore operates a real tax reform.
Indeed, effective as of January 1, 2008, all IP rights that do not exceed an annual amount of € 62,090 (income 2020) are considered by the Act of 16 July 2008 as movable income and not as professional or miscellaneous income.
The administrative commentary of Article 37 of the Code of the Income Tax 1992 reads as follows:
“Without prejudice to the application of withholding taxes, movable and immovable incomes are considered professional income when these assets are allocated to the exercise of the professional activity of the recipient of such income.
Notwithstanding, the income referred to in Article 17, § 1, 5 °, retain their quality of investment income except in the event and to the extent that they exceed € 56,450 (income year 2013 – 37,500 basic amount euros). ”
This article 17, § 1, 5 ° of the new Tax Code 1992 Income refers to:
“Income resulting from the sale or grant of auteurs’ rights and related rights, as well as legal and compulsory licenses covered by the Law of 30 June 1994 on copyright and related rights or by similar provisions of foreign law. ”
Income from royalties, provided they do not exceed the amount of € 62,090 (income tax year 2020), are taxed at the single uniform rate of 15%, deducted at source by the debtor’s rights. There is a withholding tax which therefore serves as final tax (but for the county tax applied… on the tax).
Hence, a single withholding tax of 15% applies on IP rights paid to authors after deducting lump-sum expenses, provided that the amount of such income does not exceed € 62,090 (income tax year 2020).
Above that amount, the income other conditions apply and there is thus a risk that the income will be treated as professional (or miscellaneous) income.
Since 1 January 2008, the tax treatment of royalties received in exchange for the transfer or grant of an original work thus only depends on the amount or rather a threshold is not exceeded.
Range Qualification withholding income
≤ € 62,090 household income withholding withholding 15%
> € 62,090 professionals marginal income tax rate is 50% beyond € 40,480 euros.
The beneficiary of copyright may also, pursuant to Article 6 of the Law of 16 July 2008 and Article 4 of the Royal Decree implementing the Tax Code on 27 August 1992 Income 1993, apply the deduction of costs incurred to receive them.
Thus, in the absence of evidence, deductible expenses are fixed at the rate of 50% of the first tranche of income from 0 to € 16,560 (income year 2020) and 25% of the amount from € 16,560 to € 33,110 (income year 2020).
Above € 33,110 of income, the law no longer provides for fixed costs.
Thus amounting to the following effective tax rates:
- From 0 to 16,560 EUR: 7,5%
- From 16,560.01 to 33,110 EUR: 11,25%.
Moreover for self-employed, no social security contributions are due.
The operation assignment or grant of a patent, trademark or trade, copyright, an industrial design, or other similar rights or granting licenses for such rights qualifies as services (Article 18, § 1, 7 ° of the VAT Code (hereinafter: VATS)).
As the rate of VAT applicable to such an operation, the XXIX entry of Table A annexed to the Royal Decree No. 20 of 20 July 1970 fixing the rates of value added tax and the classification of goods and services according to the rate reads:
“XXIX. Copyright, performing concerts and shows.
1. Transfers and assignments of copyrights, with the exception of those relating to computer programs.
2. The services are designed to perform works of theater, dance, music, circus shows, music hall or cabaret and similar activities that fall within the normal activity of actors, leaders orchestra, musicians and other artists, even if these services are provided by a corporation, an unincorporated association or group.
Are excluded from this tax some particular works : “While in principle a Belgian VAT at the rate of 6% is due, however, it is not due if the conditions of Article 44, § 3, 3 VATS are met, for “3 contracts edition literary or artistic works signed by the authors or composers. ”
The VAT commentary provides for the following requirements (VAT Code, Article 44, § 3, 3 :
“The publishing contracts are exempt, the publishing contracts for literary or artistic works signed by the authors or composers. The exemption is subject to the following conditions:
1) the transaction must be a publishing contract, editing assuming the reproduction of the work assigned or granted in the material form of sustainable practices, multiplied in sufficient quantities to be available to the public ;
2) the transaction must be concluded with the author or composer of a literary or artistic work, but according to the court of law, only natural persons can be considered as authors of a literary or artistic work (Decision AND 13653 of 01.12.1972 – Review of VAT 11, p 199, # 366).;
3) publishing contract must relate to a literary or artistic work. These terms include every production in the literary, scientific and artistic, such as the books of any genre (novels, technical books, comics, books in which the illustrations are an essential part …), brochures, texts of articles press conferences, speeches, homilies and other writings of the same nature, the texts of sketches, scripts and dialogues of plays and movies, adaptations of novels for the stage and for the screen, musical compositions with or without words; choreographic notations and descriptions of pantomime, the works of dramatic-musical and dramatic art, film, television works and, more generally, audiovisual (including TV shows or radio “live” interviews, commercials, the “clips” music, video games, slide shows) works of drawing and comics, painting, architecture, sculpture, etching, lithography, photographic works, works of applied art, plans, sketches, maps, and plastic works relative to geography, topography, history, architecture, science, etc.. Chap. X: 813 exemptions (1 February 2010). “
No distinction should however be made on the method of provision of the work and, therefore, as to the form of support. All techniques are taken into account, from paper to digital and websites.