Easy-iron dress shirts, odor-free sports gear, waterproof and breathable fabric: even when it comes to sportswear, the fashion and clothing industry is in a constant state of development. These days, many European countries, including the Netherlands, United Kingdom, Belgium, Luxembourg and France, have special tax regimes addressing profits derived from specific types of intellectual property rights. These regimes, called the Patent Box or Innovation Box, impose a special, ultralow tax rate on business income that derives from intellectual property. The fashion and clothing industry may find these regimes helpful.
THE DUTCH INNOVATION BOX REGIME
The Dutch Innovation Box, for example, provides for a special tax regime under which all income allocable to qualifying intellectual property is subject to an effective Dutch corporate tax rate of 5 percent (instead of the statutory rate of 25 percent). Since its introduction in 2007, the Innovation Box has provided significant tax benefits to numerous companies, both small and large. The Innovation Box can be used for intangible assets, developed or created in-house, for which a patent has been granted in the Netherlands or elsewhere, or acquired patented assets. Trademarks and logos do not qualify for the Innovation Box.
CONDITIONS AND CHARACTERISTICS
To benefit from the Innovation Box facility, the main requirement is that the intangible asset is either self-developed; or (ii) a result of further development of an acquired intangible asset.
The Innovation Box is optional. The taxpayer may choose whether or not to apply for the Innovation Box facility for a particular intangible asset. once an intangible fixed asset has been placed “in the box” this choice cannot be reversed. However, the intangible asset can be removed from the box if it is sold.
The level of profit attributable to the particular intangible asset depends on the importance and the level of R&D activities within the company, as well as the number of patents and R&D certificates (i.e. a transfer pricing exercise).
In March 2014, the European Commission issued enquiries regarding the possibility of granting a selective advantage, using an Innovation Box regime, to a particular group of companies that were in breach of EU state aid rules to several EU member states. In November 2014, an Anglo-German proposal for rules on preferential intellectual property tax regimes was announced. It is currently being implemented in the UK and Germany.
Based on talks at the EU’s Economic and Financial Affairs Council (“ECoFIN”) and the organization for Economic Co-operation and Development (“oECD”) last year, we expect international restrictions to be placed on the applicability of Innovation Boxes for certain intangible assets. If that happens, it is likely that alternative preferential Innovation Boxes may be introduced, as well as grandfathering provisions to enable companies already making use of the current Innovation Boxes, including the Dutch one, to benefit for several more years.