Tax benefits for innovative businesses in the Netherlands

In the midst of the economic crisis, where business innovation will remain an important driver for the economy and its recovery in the Netherlands, the Dutch government continues to encourage innovative companies by intensifying the Law to Promote Research and Development, the so-called WBSO. The WBSO is a fiscal incentive by the Dutch government to –among other things- compensate part of a company’s labor costs, molded into a wage tax credit. Amendments to the WBSO have been made in 2009, when the definition of ’Research & Development’ was broadened. In 2010 the application of the wage tax credit will be extended.

Moreover, the Dutch tax legislator introduced the idea of a patent box in 2007 to stimulate innovative activities and investments with beneficial tax treatment. Under the current market conditions, the need for innovation is more important than ever. In order to emphasize this, as of 2010, the patent box is transformed into an innovation box, while its scope has been broadened. It can provide (international) innovative companies with substantial tax benefits.

WBSO: R&D wage tax credit
In 2009 and 2010, more money has become available for the application of the WBSO. The amount of wages qualifying for the wage tax credit is increased from € 150,000 to € 220,000. This temporary extended application of the wage tax credit provides directly with cash advantages for innovative companies.

Application
A wage tax credit might be available on qualifying wages relating to technical innovation. Provided certain conditions are met, it is possible to obtain the wage tax credit when the R&D activities lead to the development of an intangible asset. An example of such an intangible asset might be the software developed within the own company or the preceding feasibility study, technical scientific research, or the development of a technical new (parts of) physical product, etc.

Advantages
In 2010, the R&D wage tax credit amounts to 50%, provided that the total R&D wages do not exceed € 220,000. For starting companies, this wage tax credit is even increased to 64%. Should the amount of total R&D wages exceed € 220,000, an 18% wage tax credit applies for the remainder. A request for application of the wage tax credit can be filed with SenterNovem (www.senternovem.nl), an agency of the Dutch government.

Broader scope of the innovation box
The expanded tax incentive for innovative activities has resulted also in a significant expansion of the innovation box (formerly known as the patent box) in the Dutch corporate income tax.

To qualify for the innovation box the company has to be active in R&D that leads up to patents or applies for the wage tax credit mentioned above.

In the broadened innovation box the profits resulting from R&D will only be taxed against an effective tax rate of 5%, rather than the statutory rate of 25,5%. Furthermore, the former maximum amount of profits that was attributable to the patent box no longer applies. In addition, the cap of €400,000 for non-patented intellectual property (IP) is removed.

The final flourish is that for 2009 and 2010 innovation development costs and losses on the exploitation of IP that are allocated to the patent box can be deducted against the ordinary corporate income tax rate of 25.5%. This means that costs can now be deducted against 25.5% whereas future profits are only taxed at 5%. It goes without saying that the amount of future income up to the costs deducted will be taxable at the ordinary rate but all together this provides for a substantial cash-flow benefit. Also, it reduces potential downside risk of innovation substantially as the costs are fully tax deductible to other income derived.

Conclusion
The innovation box provides for a much broader scope than the foregoing patent box. Together with the wage tax innovation facility this makes The Netherlands an interesting location for innovative companies. R&D centers, centers of excellence and similar initiatives may, stand alone or combined with other activities, obtain substantial tax benefits. 

This is a clear statement from the Dutch government that it takes innovation and attracting innovative companies to The Netherlands very seriously.

Patrick van Min
Deloitte
+31 (0)88-2882888
www.deloitte.nl