Thursday, 27 April 2017

Netherlands Changes to innovation box regime implemented

Changes to the Netherlands’ innovation box regime that apply as from 1 January 2017 include the adoption of the OECD “nexus approach,” under which, in general, only qualifying income relating to intangible assets developed by taxpayers “in-house” will be eligible for the application of the regime. The innovation box was set up to encourage entrepreneurs to engage in innovative research. Profits generated through innovative operations may be eligible for the application of the innovation box regime, and qualifying income is taxed at an effective corporate income tax rate of 5%. Bringing the regime in line with the recommendations under the OECD BEPS project (specifically, those for patent boxes under BEPS action 5) required changes to certain aspects of the Dutch innovation box.

Highlights of the changes
While the general framework of the former innovation box has been maintained, to align with the BEPS recommendations, the following rules have become stricter as from 2017:

  • A substance requirement incorporating a mathematical approach (the nexus approach) has been introduced. This requirement is designed to prevent companies from benefitting from the innovation box if they do not have a substantial economic presence in the Netherlands, or if they are not engaged in any innovative operations in the country. The presence of substantial economic operations is based on how research and development (R&D) costs are allocated between the companies in a group. If companies outsource more than a certain amount of their research work to affiliated entities (calculated based on a formula), the innovation box benefit that may qualify for the regime is restricted, and only innovation developed in-house remains eligible for tax benefits.
  • The conditions to qualify for the innovation box have been modified. Taxpayers involved in R&D work must apply for an “R&D statement” from the Netherlands Enterprise Agency, which verifies that the taxpayer is carrying out innovation. The innovation box no longer may be applied without an R&D statement (this was possible under the previous legislation, for example, if a taxpayer owned a patent).
  • A distinction between small and larger taxpayers applies in relation to qualification for the innovation box. In addition to an R&D statement, larger taxpayers (whose worldwide net group sales exceed EUR 50 million per year and whose gross income from intellectual property exceeds EUR 7.5 million per year) must have a recognized legal right to the relevant intangible assets. This includes (i) patents; (ii) rights whose nature makes them comparable to patents, including utility models, plant variety rights, “orphan” drugs and additional protection certificates; (iii) software; and (iv) other unusual assets that are new and useful. Exclusive licenses for the application of patents or plant variety rights and exclusive licenses for additional protection certificates also fall within the scope of the innovation box. If situations arise in which the application for a patent or plant variety right is ultimately rejected, any benefits previously granted under the innovation box regime will be recaptured by the tax authorities.

Consequences for existing tax agreements
Tax agreements (TAs) concluded between taxpayers and the Dutch tax authorities regarding the application of the innovation box effectively are annulled, unless the TA includes a specific reference to a transitional regime (although the tax authorities may allow TAs with smaller taxpayers to continue for efficiency purposes). In general, taxpayers that wish to conclude a new TA for 2017 and thereafter will have to contact the Dutch tax administration.

Source: Deloitte