Improved Tax Regime for Intangibles in the Netherlands
Improved Tax Regime for Intangibles in the Netherlands For a few years now, income from patents and certain other research and development (“R&D”) intangibles that originate from R&D can benefit from a lower effective tax rate under the so-called “Patent Box” regime. In 2010 the Dutch government decided to significantly improve this regime by lowering the tax rate from 10% to 5% and by eliminating the maximum applicable amount of the regime. At the same time the name of the Patent Box has been changed to “Innovation Box.” This overview provides the background, requirements and benefits of this new and improved regime that offers interesting opportunities for holding IP in the Netherlands.
Background In order to create a more attractive R&D environment, the Netherlands introduced the so-called “Patent Box” regime in 2007. Due to the restrictive nature and the complexity of the regime, Dutch taxpayers never wholeheartedly embraced this regime. Realizing some of the shortcomings of the Patent Box regime, the Dutch Ministry of Finance introduced, as of January 1, 2010, an improved version of the regime, simultaneously changing its name to “Innovation Box.” Under the Innovation Box regime, a tax rate of 5% applies to the income generated by a qualifying intangible to the extent the income from the intangible exceeds the related R&D expenses, other charges and amortization of the intangible. This represents a significant tax rate reduction, considering the normal Dutch corporate income tax rate is currently 25% and the incentive tax rate under the Patent Box regime was 10%. Moreover, any expenses or losses related to the intangible are deductible at the ordinary rate. As with the Patent Box regime, the Innovation Box regime is an optional regime for Dutch taxpayers. Quite interestingly, income qualifying for the reduced tax rate comprises all economic benefits derived from the intangible, including profits from products, royalty income and capital gains. The scope of the regime has also been significantly widened by eliminating the applicable maximum amount. Prior to 2010, the maximum income that could benefit from the reduced rate equaled four times the amount invested into research and development. Under the Innovation Box regime, there is no maximum amount of benefits a taxpayer can obtain.
Qualifying Intangibles The following intangibles qualify for the Innovation Box, provided they are created by the taxpayer himself: (i)
Intangibles for which a Dutch or foreign patent is granted to the taxpayer; and / or
(ii) Intangibles that originate from activities for which a so-called “S&O Verklaring” or “R&D Declaration” is granted by the Ministry of Economic Affairs. An R&D Declaration can be obtained for certain qualifying activities. Consequently, the Innovation Box can also be applied by companies that do not intend to apply for patents for the products of their R&D efforts or that develop products that are not patentable, such as software related intangibles and trade secrets. The taxpayer should be the registered and beneficial owner of the patents and the beneficial owner of the related intangible assets. The patent must contribute at least 30% to the expected income derived from the intangible. That is, other intangible value drivers contributing to the income (such as manufacturing know how), must contribute to less than 70% of the income. Income should be attributed to the qualifying intangibles on the basis of arm’s length transfer pricing principles. Marketing intangibles or brands are excluded from the Innovation Box. Therefore, to the extent part of the income earned is attributed to a marketing intangible or brand, that income will not qualify for the Innovation Box. Because the 5% tax rate under the Innovation Box only applies to “qualifying income” (i.e., income derived from qualifying intangibles), the non-qualifying income will continue to be subject to the regular Dutch corporate income tax rate. As noted below, the exact allocation between qualifying and non-qualifying income will typically be subject to a ruling which is valid for a number of years.
Foreign R&D Activities and Outsourced or Shared R&D Activities The Innovation Box has not been developed with only Dutch companies in mind. Considering most multinationals have R&D organizations in multiple jurisdictions - not just in the Netherlands - the question arises to what extent the Innovation Box may offer benefits to multinationals. The answer will depend on whether the relevant intangibles qualify under the Innovation Box as a patent or as a result of an R&D Declaration and whether the R&D-activities which are performed abroad are performed for the account and risk of the Dutch taxpayer. The Dutch taxpayer is
obliged to coordinate and manage the R&D-activities that are performed outside the Netherlands.
Ruling As with many other Dutch tax matters, the specific application of the Innovation Box to a set of facts are typically discussed with the relevant tax officials, followed by a ruling when appropriate to provide the taxpayer with the necessary certainty. The Dutch Tax Authorities have proven to be very cooperative in these matters.
Transfer Pricing In addition to meeting the specific requirements discussed above, transfer pricing will play a critical role in the successful and optimal use of the incentives offered under the Innovation Box regime. At least three areas can be identified up front requiring transfer pricing input:
Segmentation of the P&L to the Value Drivers: As is typically the case, there will be multiple value drivers that play a role in generating income. To determine the maximum benefit that will qualify under the Innovation Box regime, a review of the various value drivers will be necessary, with an allocation of the income based on the relevant value drivers. To optimize the benefit, the challenge will be to maximize the income that is allocated to the qualifying intangibles.
R&D Services Remuneration: Likewise, transfer pricing will play a role where the Dutch taxpayer outsources R&D activities for its account and risk to an affiliated company. In such a case, armâ€™s length consideration will have to be determined and documented.
Transfer of Existing Intangibles: Finally, to the extent existing intangibles will be transferred to the Dutch taxpayer which will be further developed under the Innovation Box regime, transfer pricing will play a role in determining the value of the existing intangibles, structuring any royalty payments and determining any amortization period.
Migration of Existing Intangibles As mentioned above, income from intangibles that have not been created by the taxpayer or for the risk and account of the taxpayer do not qualify for the Innovation Box. Nevertheless, the Innovation Box can still be very interesting for existing patents or other R&D intangibles that will be further developed by the taxpayer. The existing intangibles could be transferred to a Dutch company or the company that owns such intangibles (the “IP company”) could be migrated to the Netherlands. Upon the transfer of the intangibles or the migration of the IP company, the Dutch tax regime will provide for a step-up to the fair value. Consequently, the Dutch taxpayer will be able to amortize the existing intangibles and offset the amortizations against taxable income. If the intangibles are at the same time further developed by the taxpayer, at a certain moment the ‘old’ intangibles will be replaced by ‘new’ intangibles that may qualify for the Innovation Box. Consequently, income from the ‘old’ intangibles can be (partially) offset against the amortizations (and any related interest expenses), while income from the ‘new’ intangibles may qualify for the Innovation Box. Alternative arrangements that are fiscally attractive to migrate the existing intangibles can also be considered.
Employee Benefits In addition to the lower effective corporate income tax rate on income qualifying for the Innovation Box, significant wage tax subsidies are available for employers with employees engaged in certain specified R&D activities for which the R&D Declaration is obtained. The subsidy is a reduction of the total amount of tax and social securities due by the taxpayer during the period for which the R&D Declaration is issued and will amount up to a maximum of 50% of the first EUR 220,000 (for 2010) of the total salaries attributable to the R&D activities and 18% of the salaries attributable to the R&D activities in excess of EUR 220,000 (for 2010). The available subsidy per taxpayer is subject to a cap, which is determined annually (approximately Euro 14M in 2009). Furthermore, expats working in the Netherlands may benefit from a so-called “30% tax ruling”, which allows their employers to grant a tax-free allowance up to 30% of the employee’s salary.
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