The Dutch government stimulates innovation and R&D activities through corporate income tax incentives in the Dutch Patent and Research & Development Box (the “Patent Box”). In the Patent Box, all profits allocable to self-developed intangible assets that are patented or qualifying research & development activities are subject to a special tax regime at a rate of 10%. The profits covered include royalty income and capital gains upon the (partial) disposal of the assets less their depreciation costs. Trade marks and similar assets do not fall within the scope of this special tax regime.
Patent Box – conditions
The Patent Box applies provided certain conditions are satisfied:
- The company (taxpayer) applies the Dutch Patent Box regime to its patented intangible asset or intangible assets that results from certain research & development projects (see below).
- The Patent Box regime must be elected in the corporate income tax return.
- The patent must be self-developed and not acquired from third parties on the market (but acquired intangible assets that are embedded in the ultimate patent are not excluded).
- The patent or research & development project contributes to at least 30% of the total profits realised from the intangible asset.
- Under the Patent Box, the costs of producing the intangible assets are deductible in the year covered. Conversely, the income realised with the intangible assets is taxed in the Patent Box at the reduced rate of 10% to the extent the income exceeds (threshold) the total amount of production costs of all elected Patent Box intangible assets (on an ongoing basis). In addition, the maximum amount of income from the intangible assets taxed at the reduced rate of 10% is capped at four times the total amount of the production costs of the elected Patent Box intangible assets (on an ongoing basis).
- Income not exceeding the threshold and income exceeding this capped amount will be taxed at the statutory rate of 25.5%.
- Intangible assets patented prior to 1 January 2007 do not qualify for the Dutch Patent Box.
Research & Development – conditions
Intangible assets that are not patented are also available for the Patent Box provided the intangible assets are the result of certain qualifying research & development projects. The threshold is set at EUR 100,000 and the cap at EUR 400,000. This expansion of the Patent Box tax rate applies from 1 January 2008 and promotes smaller Research & Development projects and activities.
Dutch double taxation treaties
If the Dutch owner of the intangible assets begins to license its intellectual property, it will generally generate royalty income under the license agreements from the licensee. Apart from EU Member States, most countries levy royalty withholding tax on payments of the royalties to a foreign licensor at rates of up to 30%. The Netherlands has a wide tax treaty network that provides for reduced royalty withholding tax rates reducing the tax leakage on royalty income to just 0%-15% withholding tax on royalties paid to licensors that are tax resident in The Netherlands. This makes The Netherlands an attractive jurisdiction to own intangible assets (intellectual property rights) and operate (license) the intangible assets out of The Netherlands at the same time.
The combination between this low tax regime in the Dutch Patent Box and the reduced withholding tax rates for royalties under the widespread Dutch double taxation treaties makes The Netherlands an attractive option for establishing R&D centres.