The Innovation Box was introduced in 2007 to encourage companies to innovate and increase their research and development ("R&D"). Under this optional regime, subject to certain conditions, Dutch corporate taxpayers are taxed at an effective rate of 5 percent. In the newly published Decree, the Underminister of Finance clarifies the scope of the Innovation Box, in particular addressing the types of qualifying intangibles and the level of involvement of the taxpayer required for the application of the regime.
The Innovation Box can apply to both intangibles for which the taxpayer has obtained a Dutch or foreign patent and intangibles originating in activities for which an R&D Certificate has been obtained from the Netherlands Enterprise Agency. An R&D Certificate can be obtained for most true R&D activities (generally speaking, all research, testing, adaptation and improvement should qualify, while testing, analyzing or supporting the R&D of another should not qualify) and does not require application (or an intention to apply) for a patent. Consequently, the Innovation Box can also be applied by taxpayers engaged in activity that is not patentable.
The Innovation Box can apply only to self-developed intangibles. As regards patented intangibles, this concept extends to the development of the intangible by another (affiliated or nonaffiliated) company, provided the development has taken place for the risk and account of the taxpayer (typically, contract R&D). This requires the taxpayer to avail of the necessary functions to coordinate and manage the activity and to take strategic decisions. It does not require that the contract R&D takes place in the Netherlands, so long as the coordination and management of the R&D are performed in the Netherlands.
As regards R&D Certificate intangibles, the concept of self-development is interpreted in a stricter way and requires the taxpayer to avail of research staff to carry out the R&D itself; management of R&D Certified activities performed by another is considered insufficient to apply the Innovation Box.
It is important to note that the Innovation Box regime extends to all economic benefits derived from the intangible, including profits from the sale of products, royalty income from licensing the patented intangible and capital gains derived from a disposal of all or part of the intangible. The amount of benefits is unlimited. Which part of the taxpayer's income can be considered to be derived from the intangible is a matter of transfer pricing and the challenge is therefore to substantiate optimal allocation under the arm's-length principle. The allocation of income may be confirmed by the Dutch tax authorities in an advance pricing agreement ("APA"), valid for a number of years.