1. The Innovation Box – General
In order to promote innovative technology development activities and investments in new technologies, Dutch tax law provides for a corporate income tax incentive. This incentive is called the Innovation Box. For qualifying profits, companies effectively owe 7 percent corporate income tax, instead of the general tax rate of 20-25 percent (2018 rates).
Under the Innovation Box regime, companies can elect to have qualifying profits from patents and qualifying Research and Development (R&D) taxed at the favorable effective corporate income tax rate of 7 percent instead of 20-25 percent.KPMG Meijburg & Co
2. What exactly is the Innovation Box?
In order to have access to the Innovation Box, a company must have qualifying intangible fixed assets. Under the Innovation Box rules, the definition of a qualifying intangible fixed asset depends on the size of the taxpayer’s business. A company is considered to be a small taxpayer if the group turnover during five years does not exceed EUR 250 million in total and the gross benefits that the taxpayer derives from the qualifying intangible fixed assets during five years do not exceed EUR 37.5 million in total. A company that exceeds these thresholds is qualified as a large taxpayer.
Considering this distinction:
- for small taxpayers, a qualifying intangible fixed asset is defined as an in-house developed intangible fixed asset derived from R&D activities that benefit from the R&D remittance reduction (R&D certificate / so-called WBSO);
- for large taxpayers, except in the case of qualifying software or qualifying biological plant protection products, an additional condition also applies. Next to R&D certificates, large taxpayers should also dispose of a (requested) patent or breeder’s right, an EU medicinal products license, a registered utility model or additional protection certificate. An asset related to a qualifying intangible fixed asset or an exclusive license may under circumstances also qualify. Brands, logos and comparable assets do not qualify.
If the conditions of the entry ticket are met, then, instead of taxing the full amount of such profits at the general corporate income tax rate of 25 percent, only 7/25e of such profits may be taxed at that rate. This means that the effective tax rate is 7 percent. Before the low tax rate starts to apply, an amount of the profits equal to the development expenses of the asset must be recaptured (i.e., fully taxed at the general tax rate).
The incentive applies to self-developed (i.e. not purchased) technology-based intangible assets, such as the know-how for a new product or for a new production process. The company does not need to report the technology asset in its financial statements in order to qualify for the Innovation Box.KPMG Meijburg & Co
Please note that the R&D certificate as such also allow both small and large taxpayers to receive a certain tax credit against wage tax obligations. As of 2016, the tax base for the R&D remittance reduction not only consists of R&D wage tax costs but also other R&D costs and R&D expenditures.
3. Determining the technology-based profits and the advantages of the Innovation Box
Indicative for the qualifying benefits are the expenditures incurred by the taxpayer for the development of the qualifying intangible fixed asset. This is called the nexus approach, which splits the development expenditures into qualifying expenditures and non-qualifying expenditures. Qualifying expenditures are the total expenditures directly incurred for the development of the intangible fixed asset, with the exception of costs incurred for the outsourcing of R&D to group companies (such costs for intercompany outsourcing may only qualify up to 30 percent of the qualifying expenditures). This leads to the application of the following formula:
qualifying benefits = ((qualifying expenditures * 1.3) / total expenditures) * benefits
Determining the benefits requires tailoring, taking transfer pricing and a rudimentary functional analysis as a starting point.
4. Loss situations
The mechanics of the Innovation Box are such that the Innovation Box can also be advantageous for companies that are currently not in a taxpaying position, due to, for example, accumulated past tax losses. The advantage is that, when such a company applies the Innovation Box, its accumulated tax losses may take longer to be fully recaptured, thus extending the period in which the company is not in a taxpaying position.
If the new technology assets as such generate losses, these losses are generally tax deductible at the general tax rate of 25 percent, not at the reduced effective tax rate of 7 percent. Furthermore, initial losses incurred before business operations have been started are also deductible at a 25 percent general tax rate. The effective tax rate of 7% is only applicable again if Innovation Box losses have been recaptured. Each taxpayer can have only one Innovation Box and this means that the relevant amounts for all assets for which the Innovation Box election has been made are consolidated.
An R&D certificate can be applied for through the Netherlands Enterprise Agency (“Rijksdienst voor Ondernemend Nederland”), a Dutch government agency that is not part of the Dutch tax authorities.KPMG Meijburg & Co
5. Application process and certainty in advance (Advance Tax Ruling)
The company can start using the corporate income tax incentive by making an election in the annual Dutch corporate income tax return. In the Netherlands it is possible –and even standard practice– to discuss the practical application of the Innovation Box rules and the profit allocation question with the Dutch Revenue. Taxpayers may enter into binding agreements (Advance Tax Rulings) with the Dutch Revenue, which will obtain certainty in advance for the taxpayer. Please note in this respect that information regarding tax rulings will be exchanged with foreign tax authorities.
Ronald Honings Michael Dekkers
KPMG Meijburg & Co KPMG Meijburg & Co
Eindhoven Office Eindhoven Office
+31 (0)88 909 3289 +31 (0)88 909 3124