Innovation box regime changes in The Netherlands

Innovation box regime changes in The Netherlands

Innovation, as a driver of a nation’s economic growth, is valued very highly by governments. The Dutch government, in order to encourage the innovation process of companies in the country, introduced innovation box in 2007 and implemented changes in regulations from January, 2017.

What is the Innovation box?

The Innovation box allows companies to pay a 5% corporate income tax on their profits (derived from investing in technical innovation) rather than the regular corporate income tax rate of 20 to 25%.

However, apart from the Netherlands, there are more countries that give companies tax benefits on their profit generated from innovation operations. The differences between different countries’ innovation regimes could result in tax avoidances. Therefore, as a part of the Base Erosion and Profit Shifting (BEPS) project of the Organization for Economic Cooperation and Development (OECD), an agreement on the minimum rules of applying for this type of tax benefits were reached. To align with this agreement, the Netherlands has committed to adapt changes into the innovation box regime since January, 2017. (BEPS refers to a strategy used by multinational companies to exploit gaps and mismatches in tax rule to shift profits to low or no-tax points that has little or no economic activities.)

What are the main features of changes?

  1. The innovation box benefits are restricted to how a company divides its R&D process between its own R&D department and the third party (outsourcing ). Only the innovations that are developed inhouse are eligible for tax grants. Otherwise, the tax benefits are calculated based on a mathematical approach called “modified nexus approach”.
  2. In the past, it is possible that taxpayers got accesses to the innovation box tax benefits under the condition in which they are in possession of patents. However, this has changed. As of January, 2017, the access to the innovation box benefits requires a research and development (R&D) declaration (“WBSO-verklaringen”) that has to be applied for at the Netherlands Enterprise Agency.
  3. The new regulation distinguishes between small and larger tax payers. Larger tax payers are companies that have more than 50 million euro gross sales worldwide per year. On top of that, their net benefits from the intellectual property have to exceed 7.5 million euro per year. On the other hand, the small tax payers are the ones who have an average turnover below 50 million euros and whose gross benefits from the intellectual property are below 7.5 million on average in previous five years.

How does this affect the Dutch companies?

This change in regulation can influence companies that are currently benefiting from the innovation box both financially and administratively. For small tax payers, they can no longer get the innovation box tax grant if they only have patents instead of R&D declaration for their innovative products or process. This situation can be prevented by applying for R&D declaration. For larger tax payers, the access to the innovation box tax benefits is more restricted since they need to provide not only the R&D declaration but also patents or patent-equivalent proofs. This means that larger tax payers cannot apply for innovation benefits for an unpatented process and product innovation. Moreover, since larger tax payers and tax administration had to follow the transactional law, starting from January, 2017, the formerly existing tax agreements between the tax administration and the company became void, which means that the larger tax payers could not benefit from these agreements anymore.

Discussion

If you want to know more details about the changes in the innovation box regime or if you have any question regarding to how this will affect your company, please contact us.

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