1. The Innovations Box - General
In order to promote innovative technology development activities and investments in new technologies, a corporate income tax incentive has been introduced in Dutch tax law in 2007. This incentive was called the Patents Box and is now (from 2010 onwards) called the Innovations Box. For the qualifying profits, companies effectively owe only 5% income tax as of 2010 (2007-2009: 10%), instead of the general tax rate of 25.5%.
2. What exactly is the Innovations Box?
If a company earns profits from qualifying new technological know-how (a "technology intangible asset") in its business, it may elect to use the Innovations Box incentive. Then, instead of taxing the full amount of such profits at the general corporate income tax rate of 25.5%, only around one-fifth of such profits will be taxed at that rate. This means that the effective tax rate is only 5%. Before the low tax rate starts to apply, an amount of the profits equal to the development expenses of the asset must be "recaptured" (i.e., fully taxed at the general rate). The incentive applies to certain self-produced (i.e., not purchased), technology-based intangible assets, such as the know-how for a new product or for a new production process. The company need not report the technology asset in its financial statements in order to qualify.
There are two ways to access the Innovations Box benefits.
a.) Conditions for qualifying for the Innovations Box - Patented assets
b.) Conditions for qualifying for the Innovations Box - R&D certificate assets
3. Application process
The company can start using the corporate income tax incentive by making an election in the annual corporate income tax return. Each taxpayer can have only one Innovations Box, and this means that the relevant amounts for all assets for which the Box election has been made are consolidated.
An R&D certificate can be applied for through SenterNovem, a Dutch government agency that is not part of the Dutch Revenue.
4. Determining the technology-based profits and the advantages of the Box
The Innovations Box covers more than just the income generated from licensing know-how or patents to other companies. All kinds of current income and cost savings, including capital gains from the sale of assets, may qualify. The volume of profits that is allowed to be included in the Box is, from 2010 onwards, no longer capped. This also applies to intangible assets developed from 2007-2009, except for R&D-certified assets completed before 2010. The gains to be derived from applying the Box are, therefore, potentially unlimited.
The company must find a way to separate the portion of profit that is allocable to its new technology-based assets from the profits that are allocable to other profit generators, such as brands, marketing efforts, and general management.
In the Netherlands, it is possible, and even standard practice, to discuss the practical application of the rules and the profit allocation question with the Dutch Revenue. Taxpayers may enter into binding agreements with the Dutch Revenue, which can result in very substantial tax savings.
5. Loss situations
The mechanics of the Innovations Box are such that the Box can also be advantageous for companies that are currently not in a taxpaying position, due to, for example, accumulated past tax losses. The advantage is that, when such a company applies the Innovations Box, its accumulated tax losses may take longer to be fully recaptured, thus extending the period in which the company is not in a taxpaying position.
If the new technology assets as such generate losses, these losses are generally tax deductible at the general tax rate, not at the reduced effective tax rate of 5%.
If you are interested in applying the Innovations Box, we would be happy to explain in further detail how the Box works and which advantages the Box may offer in your specific case.Ronald Honings