The Dutch innovation box provides for a special tax regime under which all income to be allocated to qualifying intellectual property is subject to an effective Dutch corporate income tax rate of 5%. The qualifying intellectual property includes self-developed patented intangible assets or qualifying R&D activities for which a R&D statement has been obtained from 'Agentschap NL', an executive part of the Dutch Ministry of Economic Affairs.
In order to benefit from the innovation box the main requirements which should be fulfilled are that the intangible asset must be self-developed and not acquired (an exception applies for an acquired patented intangible asset if it becomes a component of an 'umbrella' asset and for which a separate patent has been obtained) and that the patent or R&D project contributes to at least 30% of the total profits realised from the intangible asset (the '30% profits – rule').
Additionally, the favourable effective tax rate of 5% can only be applied insofar and to the extent these profits exceed the total amount of development costs of the intangible asset (the 'Development Costs Threshold').
The innovation box is optional on a product by product basis
Following the introduction of the innovation box in 2007, the facility has been amended and upgraded annually e.g. the effective corporate income tax rate has been reduced from 10% to 5%, the caps for application of the innovation box have been abolished (for patents the regime was capped at four times the total amount of the development costs; for R&D assets an absolute cap of EUR 400,000 applied) and it has been explicitly allowed that operating losses are fully deductible against the regular corporate income tax rate (25% at present) instead of the reduced 5% rate.
Where the scope of the innovation box has been broadened by the Dutch government in favour of the taxpayer over the last couple of years, the innovation box has yet again been further upgraded as per January 1, 2011 to further stimulate innovative business operating in the Netherlands.
Upgrade from 1 January 2011
As the time line between the filing of a patent request and the actual granting of such patent may be a lengthy process, Dutch tax legislation has been amended to further accommodate the taxpayer as well as further stimulate use of the innovation box.
Where in the past the innovation box could only be applied in the year in which a patent had actually been obtained, the innovation box may now be applied as of the moment of filing a request for granting a patent. This new rule only applies to patented assets and does therefore not include qualifying R&D activities. This distinction should do little harm as for the latter activities the required R&D statement should in general be provided within a relative short term of 3 months.
In order to effect this new rule, the Government has opted for a system in which the so called pre-patent profits in the year in which a patent request has been filed up to and including the year prior to the year in which the patent has been granted are deducted from the amount of development costs of the intangible assets.
As a result of this mechanism, the Development Costs Threshold decreases with these pre-patent profits in the year the taxpayer requests for application of the innovation box allowing for the taxpayer to enjoy the beneficial regime at an earlier moment. In order to benefit from the innovation box in the year of granting of a patent, the taxpayer should opt for application of the box in the corporate income tax return regarding this particular year.
One point of this new regulation requiring attention is that the amount of pre-patent profits which may be deducted is limited to the total amount of development costs. Therefore, to the extent the pre-patent profits exceed the development costs, these profits are subject to the regular corporate income tax rate (for 2011: profits up to €200,000 are taxed at 20%; profits exceeding €200,000 are taxed at 25%).
This new legislation only includes intangible assets for which the innovation box will apply for the first time in the year 2011. In order to neutralise disadvantageous treatment of intangible assets for which the innovation box has been requested in past years, a transitional provision has been introduced.
For these patents the development costs as at the end of 2010 may be reduced with the total profits originating from an intangible asset in the year in which a patent request has been filed up to and including the year prior to the year in which the patent has been granted.
Please find below an illustrative example.
Click here to view the table.
Based on the transitional regime, the taxpayer may deduct the total amount of €1,000,000 in profits to be attributed to the financial year 2008 provided that the development costs are equal or higher than these pre-patent profits of €1,000,000. The 'standard rules' of the innovation box are applicable to the profits originating from the financial year 2009. The patent development period and profits are outside the scope of the transitional rules as well as the innovation box rules.
Notwithstanding the improvements made to the innovation box over the past few years, there are some elements of the current regime which can be further clarified or improved in order to make the innovation box even more attractive to innovative companies.
For example, further guidelines for the allocation of income and expenses to the developed intangible asset are most welcome as this may sometimes be a point of discussion in view of the Development Costs Threshold and the 30% profits rule. However, uncertainty on these matters may be minimised in practice by relying on the mathematical models currently used by the Dutch tax authorities and by obtaining an advance tax ruling with the Dutch tax authorities.
In view of competitive special IP regimes in force in for example Luxembourg, the Achilles heel of the Dutch innovation box seems to be that acquired patents (from third parties or group companies) are in general excluded from this favourable regime. However, this effect may be mitigated in practice as the innovation box is also applicable to milestone and buy-in payments or acquired products which are further developed for the account of such company.
Given the recent sequence of improvements to the innovation box the Dutch legislator seems open to criticism from practitioners working with innovative companies and subsequently willing to amend the relevant tax legislation in order to broaden the scope of the box and further stimulate its use. As such the future of the innovation box appears to be bright and, because of its increasing scope, offers a competitive tax incentive.