Tax Regime for Royalties under (Tax)Fire
In 2008, the legislator introduced a favourable tax regime for royalties and fees paid for the use of copyright. Under certain conditions, they are not taxed as earnings but as investment income. This can mean an effective tax rate of 7.5% instead of a tax rate of 50%.
This tax regime has recently come in the crosshairs of the taxman. He is not always satisfied that all the conditions are met.
What are royalties for the use of copyright?
Copyright is the legal right of the owner of intellectual property. Copyright law gives the creator of creative work the exclusive right to further use and duplicate that material for a given amount of time, after which the copyrighted item becomes public domain. It can be a book, a work of art, a piece of music, … any work that is the result of the creator’s intellectual or artistic effort, it must show originality and is cast in a concrete form. An idea is not sufficient, it must be put on paper, on a cd, ….
One usually thinks about authors, composers, artists … but architects who draw plans, software developers who design certain software, advertising agencies who design advertisements, etc. also make copyrighted works. The copyright regime could also benefit graphic designers, copywriters, illustrators, photographers, designers, journalists, editors, teachers/lecturers.
Employees, self-employed freelancers, or company managers can decide to transfer their copyrights to their employer, principal or management company, in exchange for a fee, the royalty.
The Income Tax Code states that royalties for copyrighted work is treated as income from investments, up to a maximum of € 64,070 (in 2022) and taxed at a fixed rate of 15% and is exempt from social security. However, royalties over €64,070 are taxed at the progressive rates on top of other earnings.
Particularly interesting is that the author can take a fixed allowance for expenses of 50% (on the first €17,090) and 25% on the bracket between € 17,090 and € 34,170, and 0% over € 34,170. On the first €17,090, the effective tax is a mere 7.5%.
On a royalty of €10,000, only €5,000 is taxed at 15%, that is € 750, 7.5%.
The victim of its own success?
In certain sectors, like advertising, journalism, etc … it has become very common to pay the employee a salary and a royalty for the use of her copyrighted work. It is literally part of the remuneration package.
And that has not escaped the attention of the taxman and they are expanding their targeted audits to catch out the inappropriate use of the tax regime for royalties.
What are they checking?
- Are royalties paid for work that is actually copyrighted?
- Is there an agreement between the employer and employee to transfer the copyright to the employer?
- The correct ratio salary/royalties
- Justify with individual reports (tax forms 281.45)
To be copyrighted, the work must be the result of the creator’s intellectual or artistic effort, it must be original and it must be expressed in a certain form.
Tax inspectors often query whether the work is actually protected by copyright and whether it is "original", i.e. does the work bear the creator’s personal stamp?
The case law of the courts and the rulings issued by the Ruling Committee give a guideline of what is considered original. However, the degree of originality is often left to the personal appreciation of the tax man. When auditing architects, the tax authorities often query that the plans of a building are sufficiently original.
The transfer of copyright and the royalty paid must be specifically agreed in a contract. If the royalty and the amount of the royalty is not specifically determined, there is a risk that the taxman will consider that no royalties are due. They will then tax on the royalty as earnings at the progressive rates and with social security.
Understandably, the tax authorities have no time for employees or self-employed who are remunerated with royalties only.
As a rule of thumb, the authorities accept that a quarter of the creative time, and only the creative time, not administration, is remunerated with royalties for the use of copyright. They assume that 10 to 40% is spent on administration and only 60% to 90% on creative work. Hence, the maximum is between 15 and 22.5% by way of royalties for copyrighted work. In any event, it is highly advisable to clearly document the time spent on creative work with time sheets ; that will make it more difficult for the tax authorities to query the distribution.
For company directors, there is a specific method for determining the amount of the royalties for copyrighted work.
If the taxman is of the opinion that the percentage is too high, the excess will be taxed as earnings.
Royalties paid for the use of copyright must be specifically reported in individual reports (fiche 281.45 comparable to the fiche 281.10 for remunerations).
This is a new obligation since this year for royalties paid in 2021. Failure to report these royalties means that the royalties are not tax deductible for the payor and that the special secret commissions tax is due on these royalties.
Is the end neigh?
The favourable tax regime for royalties of copyrights is coming under increasing pressure.
In a recent report on tax reform, the High Council of Finance proposed abolishing the favourable regime (First report on a broad tax reform), and in his 2021 plan against tax and social fraud, the Minister of Finance stated that he wants to tackle abuses with royalties.
Although a tax reform is imminent, the question remains whether or not the copyright tax regime will escape it. To date, however, the Ruling Service still issues rulings concerning royalties.