European Horizon 2020 subsidies make up a component of the taxable income of the company to which they are awarded. Because it involves project support, and this implies that expenses will be incurred, it does not necessarily have any impact the operating profit and tax.
What does the law say?
There are no specific provisions about the European Horizon 2020 subsidies to be found in the Belgian Income Tax Code. That is in stark contrast to farm subsidies, regional regulations or employment subsidies, which do indeed fall under a fiscal regime . We therefore revert back to the general principles regarding tax treatment of "subsidies granted to companies by the government". In the Horizon 2020 case, it concerns an operating subsidy, in other words a subsidy that is not conditional on an investment in fixed assets.
Not tax-free, only a limited impact
Article 95 KB W. Venn. states that capital subsidies that are not conditional on an investment in fixed assets are recorded as operating revenue or financial revenue in the income statement. This means that the subsidy is an integral part of the taxable revenue of the company that is awarded the subsidy.
Please note that taxes are only payable if there is indeed profit. Revenue in itself is not taxable. And as Horizon 2020 subsidies are actually used to cover project costs (for 70% or 100%), there are indeed costs associated with it. A Horizon 2020 subsidy, therefore, may not have any effect on the profits, and thus also not on the taxes you pay on these profits.
Of course, it is possible that with some of the (research) activities now being plugged into a financed project, less costs for research will be incurred centrally. And that the profits of the company will therefore increase, as will the taxes that are payable on them. But that is another complexity...
How and when to record?
For the moment of taxability, we need to have a look at accounting law, since there are no specific relevant provisions in the tax code. The Accounting Standards Commission describes the procedure in the following recommendation : a subsidy must be registered at the moment that the company’s claim to this subsidy has been reasonably established, and not, for example, on the date of the actual payment. For Horizon 2020 subsidies it is best that you record the subsidy at the moment of formal assignment, on the date that the Grant Agreement is signed by the project coordinator and the European Commission.
At that point in time, however, only the maximum subsidy is recorded (that is, 70% or 100% of the approved budget + 25% overhead). First, expenses must be incurred (execution of the project), and paid, in order to be able to assess what the actual subsidy amount will be. For your accounting this means that upon granting the subsidy amount it must be indicated on the balance sheet, under sheet item 48x xxx (subsidy that can potentially be recovered)
Only once the costs are incurred, can this item then be recorded, for example, on account 740 (operating subsidies and compensatory amounts) of your income statement. This dynamic ensures that, in practice, the subsidy eventually has little to no effect on your profits.
For Horizon 2020 reimbursements, there are always costs related to the subsidy; it is not, therefore, a subsidy for depreciable material, which is why there has to be a link between the costs and the subsidy. Account 150 (capital subsidies) may not be used in this case, seeing as it is only used for capital subsidies granted for (depreciable) investments in tangible fixed assets.
State aid? De-minimis?
The subsidies from Horizon 2020 do not fall under the state support (state-aid) regulation. It should therefore be considered financial revenue and from a financial perspective treated in the manner described above.
It can, among other things, also be found in the EC Communication nr. 2015/C 198/01 , where under item 9 it talks about "Union funding centrally managed by the institutions, agencies, joint undertakings or other bodies of the Union that is not directly or indirectly under the control of Member States does not constitute State aid."
First Aid at Horizon 2020
Revenue vs cash flow
Revenue must not be confused with actual cash flow. While the subsidy is indeed allocated in its entirety, it is not yet payed out until such time as that the project actually begins.. The final amount is paid out at the end of the project, once all costs have been reported and verified.
In order to reduce the impact on your project’s cash flow, the total subsidy amount is paid out in partial interim payments. In practice, you can expect an advance at the start of the project, and subsequently an annual advance. The size of the advance is complicated and depends on a number of factors. But roughly, for a project lasting three years, there will be 3 advances of about 30% each paid out at the start of each year. The remaining amount shall be paid out in the last payment which shall take place once the project has already ended.. Of course we assume that sufficient acceptable costs would have been incurred, otherwise the amount of the subsidy will of course be decreased.
The advances will help keep your cash flow in balance, but be aware that there will always be periods with a negative cash flow, in particular during those months just before and just after a project year.
TIP If you wish, your NCP can make a high level estimate of the cash flow associated with your Horizon 2020 project. Please contact us for this.
Fictional example: small, short project
Let’s take a look at the support provided for an 18-month project that is supported as an Innovation Action (IA), therefore the support amounts to 70% of the (approved) budget. We will assume monthly personnel cost of 5 000 EUR and 20 000 EUR annually in direct (i.e., project-related) costs. . The cost of the project is thus 120 000 EUR, to which another 25% overheads should be added (for indirect costs), bringing the total budget to 150 000 EUR. The support amounts to 105 000 EUR (=70%).
Costs/profits. At the moment of signing the Grant Agreement (01/07/2016) you would record 105 000 EUR on account 48XX XXX. The planned start date of your project is 01/10/2016 and the project will last for 18 months. We start with a proportionate distribution of the demonstrable costs - in 2016, this means 25k EUR of costs (3 months), or 100k EUR of costs in 2017 (12 months) and the remaining 25k EUR in 2018.
In 2016, you then transfer 17 500 EUR (3/18 of the support) to account 740. In 2017 you transfer 70 000 EUR (12/18) and in 2018 the remaining 17 500 EUR.
Your own share of the project costs then respectively amount to 7 500 EUR, 30 000 EUR and 7 500 EUR (30% of the total budget).
Cash flow. Every year, you receive a portion of the support as an advance. What this actually means is that you will be getting 50 k EUR at the start, then, 12 to 14 months later the next advance of 28 k EUR and 3 to 6 months after the end of the project the remaining 27 k EUR. Please note that these years refer to project years.
Impact on taxes. You have completed a project of 150 000 k EUR and received 105 000 EUR worth of support for it. Thus, you have a net cost (financial losses) of 45 000 EUR, which under the non-concessionary rate of the corporation tax (33.99%) leads to a discount of almost 15 300 EUR. The actual costs to carry out the project are thus reduced to 30 000 EUR.
Return on investment. Naturally, this cannot be easily quantified and monetised, but you have in fact then achieved a return of 500% (investment of 30 k EUR, total project value of 150 k EUR). Plus, more importantly: you have done research and development, the results of which, - once commercialised - can result in further multiplied effects in terms of this yield.
We would like to thank Herman De Cnijf (Brussels Tax College) for his advice. We appreciated it immensely.