18 May The innovation box: reduce corporate tax on profit from innovation activities
The innovation box: reduce corporate tax on profit from innovation activities
18 May, 2020
Companies that have developed intangible assets (an invention or technical application) can deduct the development costs from the company’s annual profits in the year in which the asset was developed. Under international pressure, including the OECD initiatives relating to Base Erosion and Profit Shifting, the Innovation Box regulations have been tightened up. The new rules for access to the innovation box apply from 1 January 2017 and their application has been to intangible fixed assets produced after 30 June 2016.
Actual economic activities in the Netherlands
The innovation box as a facility is in principle now only open to enterprises with actual economic activities in the Netherlands, where the intention is now only to grant a tax subsidy for an innovation developed in the own enterprise in the Netherlands. The innovation box benefits are then determined in the light of a ratio between qualifying and non-qualifying innovation expenditure (nexus break).
Only ‘intangible fixed assets’ produced by the enterprise itself can qualify for the innovation box. Purchased intangible fixed assets do not qualify, except that a purchased intangible asset that is then developed further may again qualify if the further development results in a ‘new’ intangible asset.
Under the new rules access to the innovation box is only open to intangible assets for which a so-called R&D declaration was issued by the Netherlands Enterprise Agency (RVO). This is a departure from the legislation applicable up to 2017, under which holding a patent was already sufficient for the company’s option to place the benefits in the so-called innovation box.
Distinction small and bigger taxpayers
Furthermore, for access to the innovation box from now on a distinction is made between small and bigger taxpayers. Bigger taxpayers (consolidated group turnover of more than € 50 million per year and turnover from intangible fixed assets of more than € 7.5 million per year) must in addition to an R&D declaration have a recognised legal access ticket. This includes among other things patents, rights similar to patents such as utility models, cultivator rights, drugs and software. Intangible assets that relate to biological crop protection products based on live (micro-)organisms may also qualify for the innovation box. These stricter access requirements of a recognised legal access ticket do not apply for smaller qualifying enterprises as such.
Application of ‘old’ scheme
Up until the last financial year ending before 1 July 2021 the ‘old’ innovation box scheme remains in force, but only for innovations to which the innovation box scheme already applied as of 30 June 2016. The result of this is that all intangible fixed assets qualifying before 1 July 2016 for which the innovation box applied in the declaration for the financial year in which 1 July 2016 falls, calculated from this date may still avail themselves of the old scheme for a maximum of five more years.
Rate of corporate tax
The rate for corporation tax for innovative activities amounts to 7% (2020). From 2021 this will rise to 9%. Losses on innovative activities can from now on be deducted at the normal corporate income tax rate. The outsourcing of R&D work is also possible if the principal has sufficient activities and knowledge present. It is also possible to include innovation advantages obtained between the application for a patent and the granting of a patent in the innovation box. There is no maximum to the profit taxed at the special rate of 7% (2020).
The company has the option to declare an innovation box benefit equal to 25% of the company’s total profit instead of complex profit allocation to the qualifying intangible asset(s). The benefit is however limited to the amount of € 25,000. The option is valid in the investment year and in the following 2 years.
A number of additional technical and administrative conditions must however be fulfilled to be able to qualify for the aforementioned tax benefits. For example, to make use of the innovation box the intangible assets must contribute at least 30% to the profit that the company receives from the intangible asset. The innovation box does not apply to brands, logos, TV formats, copyrights on software and so on. The choice must be specified in the corporate income tax declaration.
The Netherlands Enterprise Agency deals with subsidies and programmes as the innovation box.
Do you have questions about your specific situation? Do not hesitate to contact us for more information. In addition, we have a manual available about the investment environment in the Netherlands. Read all about doing business in the Netherlands in this manual.