Dutch government publishes proposal on R&D deduction for Dutch tax purposes

On 10 October 2011 the Dutch government published a legislation proposal on the Research & Development Deduction (hereafter referred to as “RDA”), which facility was already announced before.

The objective of the RDA is to facilitate R&D costs – not being labour costs – and investments in R&D equipment (such as e.g. investment in laboratory, purchase of material, rental of equipment). Under the proposal a RDA for Dutch tax purposes is provided to taxpayers that perform R&D activities for which they obtained a so-called “S&O declaration”. As this tax deduction is directly linked to the R&D costs and investments made, the net amount of costs for innovative activities will decrease so that taxpayers can invest more in innovation with the same budget.

With this facility, a complete tax package of measures to stimulate R&D activities of companies in the Netherlands is created:

• a deduction for the labour costs regarding R&D (through a reduction of wage tax and social security contributions);
• the innovation box (to tax innovation profits at a favourable effective corporate income tax rate); and
• other R&D costs and investments by means of the RDA.

Both entrepreneurs under the Personal Income Tax Act 2001 and companies under the Corporate Income Tax Act 1969 can make use of the RDA. The Dutch government appropriates a sum of EUR 250 million in 2012, a sum of EUR 375 million in 2013, and EUR 500 million for 2014 and following years for the RDA. The Tax Plan 2012 – including the RDA proposal – is currently discussed in the Dutch Lower House and will be followed by a discussion in the Dutch Upper House as of mid-November.

Methodology
The RDA gives a taxpayer an extra deduction, i.e. a certain percentage of R&D costs and investments, from the taxable profits of the taxpayer. The starting point of the RDA is the amount of costs (not being labour costs) and expenses (including investments) that are directly attributable to R&D activities for which the taxpayer has been granted a so-called “S&O declaration”.

The basis of the RDA will fit in – as much as possible – with the basis of the already existing contribution reduction R&D in the Law on the reduction of wage tax and social insurance contributions (in Dutch: “Wet vermindering afdracht loonbelasting en premie voor de volksverzekeringen”). On the basis of the aforementioned costs the taxpayer can request an RDA decision at Agentschap NL. The RDA decision will reflect the amount that can be deducted from the taxable profits in the taxpayer’s personal or corporate income tax return. This amount is based on a certain percentage of R&D costs and investment of the taxpayer with respect to the taxpayer’s R&D project (in Dutch: “S&O-project”). If a RDA decision is too high (not in case it is too low), a correction RDA decision can be issued, for instance in case of a disinvestment.

Expected percentage
The State Secretary of Finance expects that the applicable RDA percentage in 2012 will be 40%, which will cause an effective tax advantage to corporate income taxpayers of 10% (i.e. 40% of the corporate income tax rate of 25%) of the qualifying RDA basis. For 2013, the effective tax benefit should be at least 13.5%, according to the State Secretary of Finance (depending on the available budget).

Research & Development Deduction (RDA)
The abovementioned percentage, as well as other important elements of the deduction (such as e.g. rules regarding the determination of the RDA basis, formalities, requirements regarding administration of taxpayer, etc), are still to be determined by the State Secretary of Finance, by issuance of a Decree which is expected to be published in November or December. It is mentioned that outsourced costs and expenses will not qualify for the RDA, but it is unknown whether this is also the case for (sub-)contract R&D.

S&O and RDA applications
Due to the obvious link with the S&O declaration, this declaration will become even more important for innovative companies. Besides the advantage by means of a reduction of the amount of wage taxes to be paid by a taxpayer, the S&O declaration gives – under certain conditions – access to the innovation box, and now it will also be the basis of the RDA as of 2012. For this reason, requesting a S&O declaration can also be beneficial for projects that require little working hours but high investments or high costs.

Please note that the application regarding a S&O declaration for a deduction for the labour costs regarding R&D for periods starting 1 January 2012 has to be filed with the Dutch ‘Agentschap NL’ before 1 December 2011. Due to the fact that the RDA rules are not yet in place no RDA applications can be submitted yet. It is however desired that the regime can be applied as from 1 January 2012. Therefore the State Secretary of Finance announced that for FY2012 likely a grand-fathering period will be introduced which would entail that until a certain period (e.g. May 2012) upon request RDA decisions can be issued with retro-active effect until 1 January 2012 for qualifying R&D projects.

Tom Philibert
Ernst & Young Belastingadviseurs LLP
+31 88 407 8504
tom.philibert@nl.ey.com