The Innovation Box provides for a special tax regime under which all income to be allocated to qualifying IP is subject to an effective Dutch corporate income tax rate of 5%. The qualifying IP includes self-developed patented intangible assets or qualifying R&D activities for which a R&D statement has been obtained from ‘Agentschap NL’, an executive part of the Dutch Ministry of Economic Affairs.
In order to benefit from the Innovation Box the main requirements which should be fulfilled are that the intangible asset must be self-developed and not acquired (an exception applies for an acquired patented intangible asset if it becomes a component of an ‘umbrella’ asset and for which a separate patent has been obtained), and that the patent or R&D project contributes to at least 30% of the total profits realised from the intangible asset (the ‘30% profits rule’).
Additionally, the favourable effective tax rate of 5% can only be applied insofar as and to the extent that these profits exceed the total amount of production expenses of the intangible asset (the ‘Expenses Threshold’).
The Innovation Box is optional on a product-by-product basis.
Following the introduction of the Innovation Box in 2007, the facility has been amended and upgraded annually, e.g. the effective corporate income tax rate has been reduced from 10% to 5%; the caps for application of the Innovation Box have been abolished (for patents the regime was capped at four times the total amount of the production expenses; for R&D assets an absolute cap of €400,000 applied); and it has been explicitly allowed that operating losses are fully deductible against the regular corporate income tax rate (25% at present) instead of the reduced 5% rate.
The scope of the Innovation Box has been broadened by the Dutch government in favour of the taxpayer over the last few years, and it was upgraded again on 1 January 2011 to further stimulate innovative business (such as pharma and life sciences companies) operating in the Netherlands.
Upgrade of 1 January 2011
As there can be a length delay between the filing of a patent request and the actual granting of such patent, Dutch tax legislation has been amended to further accommodate the taxpayer as well as further stimulate use of the Innovation Box.
Where in the past the Innovation Box could only be applied in the year in which a patent had actually been obtained, it may now be applied as of the moment of filing a request for granting a patent. This new upgrade opens up a wide area of opportunities for pharma and life sciences companies as, typically, it is a long, risky and expensive process for these companies to obtain a patent.
This new rule only applies to patented assets and does not include qualifying R&D activities. This distinction should do little harm as for the latter activities the required R&D statement should in general be provided within a relative short term of three months.
In order to effectuate this new legislation, the Dutch legislator has opted for a system in which the so called pre-patent profits in the year in which a patent request has been filed, up to and including the year previous to the year in which the patent has been granted, are deducted from the amount of production expenses of the intangible assets.
As a result of this mechanism, the Expenses Threshold decreases with these pre-patent profits in the year the taxpayer requests for application of the Innovation Box, thus allowing the taxpayer to enjoy the beneficial regime sooner than they otherwise would. In order to benefit from the Innovation Box in the year of granting of a patent, the taxpayer should opt for application of the Box in the corporate income tax return for that particular year.
It should be noted that the amount of pre-patent profits which may be deducted is limited to the total amount of production expenses. Therefore, to the extent the pre-patent profits exceed the production expenses, these profits are subject to the regular corporate income tax rate (for 2011: profits up to €200,000 are taxed at 20%; profits exceeding €200,000 are taxed at 25%).
This new legislation only includes intangible assets for which the Innovation Box will apply for the first time in the year 2011. In order to avoid disadvantageous treatment of intangible assets for which the Innovation Box has been requested in past years, a transitional provision has been introduced. For these patents the production expenses as per ultimo 2010 may be reduced with the total profits originating from an intangible asset in the year in which a patent request has been filed up to and including the year previous to the year in which the patent has been granted.
Please find below an illustrative example.
| ||Activities of taxpayer||Profits to be allocated to (future) patent |
|FY 2007||Patent development||€1,000,000|
|FY 2008||Patent request||€1,000,000|
|FY 2009||Patent grant/application innovation box||€1,000,000|
Based on the transitional regime, the taxpayer may deduct the total amount of €1,000,000 in profits to be attributed to the financial year 2008 provided that the production expenses are equal or higher than these pre-patent profits of €1,000,000. The ‘standard rules’ of the Innovation Box are applicable to the profits originating from the financial year 2009. The patent development period and profits are outside the scope of the transitional rules as well as the Innovation Box rules.
Notwithstanding the improvements made to the Innovation Box over the past few years, there is room for further clarification or improvement in order to make the Innovation Box even more attractive to innovative companies.
For example, guidelines for the allocation of income and expenses to the developed intangible asset are most welcome as this may sometimes be a point of discussion in view of the Expenses Threshold and the 30% profits rule. However, uncertainty on these matters may be minimised in practice by concluding an advance tax ruling with the Dutch tax authorities.
In view of competitive special IP regimes in force in for example Luxembourg, the Achilles heel of the Dutch Innovation Box seems to be that acquired patents (from third parties or group companies) are in general excluded from this favourable regime. However, this effect may be mitigated in practice as the Innovation Box is also applicable to milestone and buy-in payments or pipeline products acquired by a Dutch pharma and life sciences company and which are further developed for the account of such company.
Given the recent sequence of improvements to the Innovation Box, the Dutch legislator seems open to criticism from practitioners active in the field of innovative companies and subsequently willing to amend the relevant tax legislation in order to broaden the scope of the box and further stimulate use thereof. As such the future of the Innovation Box appears to be bright and, because of its increasing scope, offers a competitive tax incentive to innovative pharma and life sciences companies active in the Netherlands.