On 19 May 2016, the Dutch Government launched a public internet consultation regarding an envisaged legislative proposal with respect to changes to the current Dutch innovation box regime. The proposals in the consultation ensure that the applicability of the regime will remain unchanged for the majority of taxpayers that currently apply the Dutch innovation box. The 5% effective rate remains unchanged. The public internet consultation will end on 16 June 2016, after which a legislative proposal is expected to be presented in September 2016 (included in the 2017 Tax Budget). The legislation will then enter into force as of 1 January 2017. We recommend taxpayers currently applying the Dutch innovation box regime to verify if they will remain eligible for the revised regime. We would be happy to assist you with this and work with you on your response to the consultation.
The envisaged legislative changes are the Dutch implementation of Action 5 from the OECD BEPS-project (Base Erosion and Profit Shifting). Action 5 is aimed at combating harmful tax practices and focuses on improving transparency and exchange of information surrounding application of preferential regimes. Action 5 requires a certain level of activity (substance) for application of any preferential regime. This also affects the Dutch innovation box regime, for which Action 5 prescribes the so-called “Nexus Approach”.
The consultation document provides for a broad range of qualifying (partially new) intangible assets. At the same time, certain limitations compared to the current regime are newly introduced. The revised innovation box regime will be founded on “qualifying intangible assets” and “qualifying income”.
Qualifying intangible assets
Based on the consultation document, the following qualifying intangible assets will give access to the Dutch innovation box regime. In this respect, distinction is made between (a) small and medium-sized companies (SMEs) and (b) other taxpayers.
SMEs are - in this context - defined as taxpayers (i) deriving benefits from qualifying intangible assets of less than € 37,500,000 in the respective financial year and the four preceding financial years combined, and (ii) also having a net turnover of less than € 250,000,000 in the respective financial year and the four preceding financial years combined. If the taxpayer is part of a group of companies the second test is applied to the turnover of the total group.
Qualifying intangible assets for SMEs are self-developed intangible assets from Research & Development (R&D) activities for which so-called “R&D wage tax certificates” from the competent Dutch governmental agency have been obtained.
For other taxpayers, the definition of qualifying intangible assets contains a limitation in comparison to SMEs, because as an additional condition, such intangible assets should also qualify as one of the following:
- patents or plan breeder's rights; or
- software program(s); or
- marketing authorizations for medicinal products for human use, or marketing authorizations for veterinary medicinal products; or
- intangible assets that are related to intangible assets qualifying under (i), (ii) or (iii); or
- exclusive licenses to use an intangible asset qualifying under (i), (ii) or (iii) in a certain way, in a certain area or for a certain period of time.
Under the envisaged revised Dutch innovation box regime, the qualifying income is determined per qualifying intangible asset or per coherent group of qualifying intangible assets ('tracking-and-tracing'). If it is not possible to apply the tracking-and-tracing method, the method for determining the qualifying income will be established by taking into account the nature of the business enterprise and the R&D activities of the taxpayer. The main methods used under the current innovation box regime to determine qualifying income will remain applicable: this particularly includes the commonly used profit split method.
Under the envisaged Dutch innovation box regime, any qualifying income determined on the basis of the above can only be limited if, and to the extent that, a taxpayer has outsourced part of its R&D-activities to a company within its group. Should R&D be outsourced to group companies, limitation to the qualifying income is based on the proportion of qualifying R&D expenses incurred by the taxpayer in relation to the overall R&D expenses incurred by the taxpayer in respect of the relevant intangible asset. In this respect qualifying R&D expenses are described as the total of R&D expenses minus the R&D expenses related to the outsourcing of R&D to group companies. These qualifying expenses may be multiplied with 1.3, allowing for limited outsourcing of R&D in the group.
It is expected that the new rules for the Dutch innovation box regime will enter into force as of 1 January 2017 and apply to financial years commencing on or after 1 January 2017. A grandfathering period will be applicable to qualifying intangible assets which have been developed before 30 June 2016. The current Dutch innovation box regime in principle continues to apply to these assets. The grandfathering period will end as of financial years commencing on or after 1 January 2022. It is not yet clear how the grandfathering period will in practice affect taxpayers that currently apply the Dutch innovation box regime. More clarity on this is expected in the months leading up to the 2017Tax Budget.