As announced earlier in 2016, the Netherlands has enacted a new innovation box regime as of January 1, 2017, in line with the outcomes of the OECD’s BEPS project (Action Plan 5). The new legislation has a grandfathering period until 2021 for (qualifying) intellectual property (“IP”) developed before July 1, 2016.
Because of the new regulations, all existing innovation box rulings with the Dutch tax authorities have been cancelled as of January 1, 2017.
The innovation box regime in the Netherlands was first introduced in 2007. The innovation box regulations in the Netherlands allow companies to have profits derived from (qualifying) IP taxed at an effective 5% corporate income tax rate (instead of the regular corporate income tax rate of 20 to 25%).
The new Dutch innovation box regime is in line with the OECD’s so-called ‘modified nexus approach’. Under the modified nexus approach, qualifying profits that benefit from the new innovation box regime are calculated as follows:
(Qualifying expenditures / Total expenditures) x overall income from ip asset = income receiving IP benefit
The main difference between qualifying expenditures and total expenditures are expenses for contract R&D-activities outsourced to group companies. In line with the modified nexus approach, the qualifying expenses are increased with 30%, to a maximum of the amount of total expenses. Because of this 30% up-lift taxpayers that only outsource a small part of their R&D-activities to group companies are not faced with restrictions under the new innovation box regime. Expenses for contract R&D-activities performed by third parties are considered qualifying expenses since (in line with the modified nexus approach), a company is expected to only outsource ‘non-fundamental’ R&D-activities to third parties.
The new Dutch innovation box regime distinguishes small and large taxpayers. Small taxpayers are taxpayers with a five-year average turnover resulting from qualifying IP below EUR 7.5 million and a total five-year average turnover below EUR 50 million. Taxpayers that exceed one of these thresholds qualify as large taxpayers.
To qualify for the innovation box regime, both categories of taxpayers must have so-called R&D-declarations (“WBSO-verklaringen”) for the development of IP. Additionally, large taxpayers need to have patents, exclusive licenses, software programs, plant breeders’ rights or pharmaceutical certifications to qualify for the new innovation box regime.
In line with the previous Dutch innovation box regime, the new legislation contains guidance on how to deal with acquired IP. If a taxpayer continues R&D-activities relating to acquired IP, the regime can only be applied insofar these continued R&D-activities result in new IP. Otherwise, profits derived from acquired IP don’t fall under the innovation box regime.
The legislation contains specific documentation requirements for taxpayers using the innovation box regime. Taxpayers are required to maintain all relevant information for determining the allocation of income to the innovation box. These documentation requirements in principle already existed under the old regulations, but have been clarified under the new legislation.
All IP developed after June 30, 2016 falls under the new innovation box regime for fiscal years starting on or after January 1, 2017. A grandfathering rule has been introduced, allowing qualifying IP developed before June 30, 2016 to benefit from the current regime up until July 1, 2021. Furthermore, for large taxpayers, patented IP (or breeders’ rights) developed before January 1, 2017 will be considered qualifying IP under the new regime, even if the additional requirement (R&D-declaration) is not satisfied.
Many taxpayers have concluded rulings with the Dutch Tax Authorities to have certainty about the application of the innovation box. For large taxpayers, the new regulations mean that their concluded ruling are no longer valid, as all rulings contain a clause stating that rulings are no longer valid if significant changes in legislation occur. Large tax payers should therefore file for a new ruling as of January 1, 2017. Small taxpayers can still use their rulings subject to specific requirements and after confirming to the tax authorities that these requirements are met (ultimately before filing the 2017 tax return). Late December 2016, the Dutch State Secretary of Finance has published a ‘model statement’ for this purpose.
The new innovation box rules in the Netherlands affect many companies. Especially for large taxpayers it will become more difficult to apply for the new innovation box regime due to the double entry-ticket-requirement (i.e. an R&D-declaration and a patent / patent-like registration). In this regard, small taxpayers could apply for the innovation box with a patent, but now small taxpayers should always have an R&D-declaration. Also, for large taxpayers, their previously concluded rulings are no longer valid and therefore new rulings should be obtained.
Would you like to discuss the new innovation box regime and discuss the possibilities and / or consequences for your company? Contact Frank Schwarte (frank@TAeconomics.com / +31 20 535 4550) or Lennaert Mosk (lennaert@TAeconomics.com / +31 20 535 4552).