How to Prevent the Innovation Income Deduction (IID) from Becoming a Trap in an Acquisition ?

Introduction

The Innovation Income Deduction (IID) is one of Belgium’s most attractive tax incentives for innovative companies. Yet in the context of an acquisition, this incentive can unexpectedly turn into a fiscal trap if it has not been correctly documented, valued, or maintained. Many deals underestimate the extent to which the IID interacts with intellectual property, tax structuring, valuation, and post-merger integration.

The purpose of this article is to draw the attention of both acquirers and sellers to the often-overlooked risks surrounding the IID in M&A transactions, and to explain why both pre-acquisition IP valuations and post-deal IP decisions are critical to securing — or potentially jeopardising — this tax advantage.

 

IID: A Valuable Incentive That Can Become a Liability in a Deal

The IID significantly reduces the tax burden for companies that commercialise patented technologies, software, etc. But this reduction only holds if several conditions are met: the eligible income must be clearly linked to the protected asset, the R&D activities must be properly documented, and the methodology used to assess the value of the IP must be solid.

When these foundations are weak, the IID may represent a hidden risk for an acquirer. A poorly supported deduction can lead to questions during due diligence, price renegotiations, clawbacks from the tax authorities, or even disputes after the transaction closes. In short, what appears to be an asset on paper can become a latent fiscal exposure, especially when the company has claimed the IID aggressively or without adequate documentation.

 

Why a Pre-M&A IP Valuation Is Essential

An independent valuation of the intellectual property is the most effective way to assess whether the IID claimed by the target company is sustainable. A valuation helps determine whether the protected technology genuinely supports the income reported as eligible, whether the company’s calculation aligns with recognised valuation standards, and whether the asset’s value is consistent with the scale of the tax benefit claimed.

For an acquirer, this analysis helps reveal potential inconsistencies or red flags early enough to adjust the price or address the issue in the SPA.

For a seller, it is an opportunity to demonstrate the robustness of its tax position, accelerate due diligence, and avoid disproportionate warranties being requested later in the process.

 

Critical points of attention for both buyers and sellers

For the buyer, the key objective is to ensure that the target company has applied the IID on a solid and defensible basis. A credible valuation and complete documentation help to confirm that the underlying asset truly carries the value required to justify the tax benefit. A rigorous review avoids inheriting a hidden liability and allows the buyer to adjust the purchase price appropriately, if needed.

For the seller, well-structured documentation and an independent valuation not only reassure the buyer but also help preserve the deal’s value. In some cases, an IP valuation may even reveal that the asset has been undervalued, offering a strong argument in favour of the seller during negotiations.

Both parties therefore benefit from this clarification work: the buyer by reducing the risks, and the seller by protecting (and sometimes enhancing) the value of the business.

 

Post-Acquisition Decisions: A Critical and Often Ignored Dimension

Most risks related to the IID do not arise before the deal — they appear after the acquisition, when the buyer reorganises the intellectual property within the group. The way the IP is structured post-deal directly impacts the company’s eligibility for the IID going forward.

One common scenario is the centralisation of IP in a group holding company. While this makes sense from a global IP management perspective, it can have unexpected tax consequences: once the IP is transferred, the operating company may no longer be eligible for the IID unless licensing structures are put in place and priced at arm’s-length. The transfer itself must be valued rigorously; otherwise, the tax authorities may challenge the valuation or the IID base.

Another typical situation is the relocation of R&D activities. If the innovation work that justifies the IID is moved to another entity post-acquisition, the deduction may no longer apply to the original company.

Mergers, carve-outs or asset contributions can create the same problem: the ownership of the asset and the ownership of the income must remain aligned for the IID to be valid.

In all these cases, a structured analysis is required to ensure that the benefit is not inadvertently lost due to integration choices made after the closing.

 

The Need for an Integrated Approach: IP, Tax, Valuation and M&A Expertise

The IID sits at the crossroads of several disciplines. Legal IP expertise alone is not enough, nor is a purely fiscal analysis or a generalist M&A review. What is required is a combined understanding of the protected asset itself, the financial valuation of the technology, the mechanisms behind the IID, and the implications of post-deal restructuring.

Without this integrated approach, acquirers risk basing their decision on incomplete information and sellers risk seeing their valuation reduced because the tax position cannot be defended. With the right expertise, however, the IID becomes a genuine value driver, strengthening both the deal and the long-term structuring of the group.

 

Conclusion

The IID can either support an acquisition or undermine it. The difference lies in whether the company’s intellectual property has been properly valued, whether the link between the IP and the eligible income is clear, and whether the post-deal integration has been planned with the IID in mind.

A thorough pre-M&A valuation and a forward-looking analysis of post-acquisition IP strategy are the best ways to turn the IID into a strategic asset rather than a fiscal risk. For both buyers and sellers, understanding this dynamic is essential to protecting — and maximising — the value of the transaction.