The Innovation Box Tax Regime in the Netherlands
The tax law in the Netherlands offers a preferential regime for corporate taxation with the aim to promote activities related to investments in novel technologies and development of innovative technology. This is the Innovation Box (IB) regime. For profits meeting the requirements for IB, companies owe a total of 7% corporate tax, rather than the 15 – 25.8% usually levied (according to the rates for 2022).
Description of the IB regime
To be eligible for taxation under the IB regime, companies should have fixed intangible assets that meet certain requirements. According to the IB rules, qualifying assets are determined taking into account the taxpayer’s company size. Small taxpayers have a total 5-year group turnover below 250M Euro, while the total gross benefit derived from the eligible intangible assets for the 5-year period is below 37.5M Euro. Companies exceeding these thresholds are qualified as large taxpayers.
In these terms:
qualifying assets of small taxpayers are fixed intangible assets developed in-house and derived from Research and Development (R&D) activities benefitting from remittance reduction (WBSO – R&D tax credit / R&D certificate);
qualifying assets of large taxpayers (excluding cases of software or biological products for plant protection) must meet some additional conditions. Besides R&D certificates, the companies must also have an EU license for medicinal products, a breeder’s right/(requested) patent, a certificate for additional protection or a certified utility model. Assets related to qualifying fixed intangible assets or exclusive licenses may also qualify under particular circumstances. Logos, brands and similar assets are not eligible for tax reduction.
If the eligibility conditions are fulfilled, then such profits are not taxed at the usual rate of corporate tax, i.e. 25.8%, but at a reduced rate of 7%. Therefore the actual tax amounts to 7%. Before applying the reduced tax rate, the expenses for the asset’s development need to be recaptured from the profits, which means that their amount will be taxed using the full general rate).
It is important to mention that R&D certificates allow both large and small taxpayers to apply for a tax credit with respect to wage tax liabilities. Since 2016 the basis for remittance reduction related to R&D consists of the costs for wage tax plus other R&D expenditures and costs.
Determination of the profits from technology and benefits of the IB regime
The profits eligible for reduced corporate income tax are determined by the expenses of the taxpayer related to the qualifying assets’ development. The expenditures for development are split in two categories: eligible and non-eligible, using the so-called nexus approach. Eligible expenditures are all direct costs related to the fixed intangible asset’s development, except any costs for outsourcing R&D tasks (costs incurred for outsourcing can reach a maximum of 30% of the eligible expenditures). Therefore, the formula below is applied:
eligible costs x 1.3
eligible profits = -------------------------------------------------- x profits
The profits are determined by tailoring. A simple functional analysis and transfer pricing can be used for a start.
The IB regime is structured so that it can also bring advantages to companies that aren’t currently paying taxes, e.g. due to accumulated tax losses in the past. In this case, if the company uses the IB regime, the full recapture of its accumulated losses from tax can take longer, so the period for which the entity is not liable for taxes will be extended.
If the developed assets in the field of technology lead to losses, the lost amounts can usually be deducted for the means of taxation at the usual 25.8% rate, and not the low effective 7% rate. Also, any initial losses that were incurred before the start of business operations can also be deducted at the general corporate tax rate of 25.8%. The reduced 7% rate is applicable again only after recapture of IB losses. A taxpayer can only have one IB. Therefore the amounts relevant to the intangible fixed assets under IB regime are consolidated.
Application submission and certainty for future taxes (Advance Tax Rulings, ATR)
A company can use the reduced corporate tax rate by selecting the relevant items in its yearly corporate tax return. In Holland, it is not only possible, but it is a standard procedure to go over the practical aspects of the IB principles and the question of profit allocation with the Tax and Customs Administration (Revenue Service). Taxpayers have the option to conclude binding agreements (ATRs) with the administration and, by doing so, have certainty with respect to future taxes. It is important to mention that the information on tax rulings is exchanged with international tax authorities. Read more on the Advance Tax Rulings in the Netherlands
If you need more details or legal support, please, get in touch with our Dutch tax agents.