Innovation box in general
The Dutch innovation box regime provides for the possibility to be effectively taxed at a reduced rate of 9% (instead of the regular corporate income tax rate of 15%-25%) with respect to income from qualifying intangible assets. To make use of this regime it is required that the taxpayer has developed one or more intangible assets as a result of research and development (R&D) activities for which one or more R&D statements have been obtained. If a taxpayer does not qualify as a small and medium sized enterprise (SME), complementary legal tickets (e.g. patents) may be required in addition to the R&D statements.
Political trend in recent years
Following recommendations of the OECD BEPS project, the innovation box regime was amended as from 2017. The regime was tightened in order to prevent abuse by multinationals: substance and nexus measures were introduced as well as complementary legal ticket requirements.
Over the last years – also adhering to the conclusions of the OECD BEPS project – mainly left-wing parties argue that multinationals do not contribute their fair share to the Dutch budget. To that end, it is also argued that the innovation box regime – which represents a combined reduction of corporate income tax of € 0.5 billion on national level – contributes to this inequality as multinationals benefit more from the regime compared to small and medium sized enterprises (SME's), start-ups and scale-ups.
The Dutch political party ‘SP’ took it one step further and even filed a motion requesting the Dutch government to completely abolish the innovation box regime as from 2019. This motion just came 11 votes short to pass, receiving 65 of the 150 votes.
Nevertheless, following the controversy and due to budget cuts, the original effective rate of 5% has been increased to 7% as from 2018 and to 9% as from 2021.
On 17 March 2021, the Dutch voters can cast their vote for the House of Representatives, after which a new government will be formed. It is not surprising that the fairness of the tax system is discussed in most of the election programmes, especially since the costs of the COVID-19 pandemic will have to be divided amongst taxpayers. In all political party programmes that the Netherlands Bureau for Economic Policy Analysis (CPB) has reviewed and calculated, an additional tax burden is foreseen for businesses active in the Netherlands. Many political parties want to accomplish this by, amongst others, cutting down on the budget for the innovation box regime.
Having a look at the specific programmes, a few things stand out. The VVD would like to maintain the status quo and the CDA is the only party willing to invest in the innovation box regime, by increasing the budget with an amount of € 0.1 billion (which is quite substantial in comparison to the total budget of € 0.5 billion that is currently spend on the regime).
The other political parties specifically mentioning the innovation box in their election programmes would like to either completely abolish the regime (Denk, GroenLinks and SP) or to make the regime less attractive by increasing the effective tax rate with 3 to 6%-point, bringing it to a total effective tax rate of 12 to 15% (D66, 50Plus, ChristenUnie and PvdA). Increasing the effective tax rate to 15% would make the effective tax rate equal to the current lowest corporate income tax rate (2021) for the first € 245,000 of taxable profits.
The above could be worrying for innovative businesses. In this respect it is noted that some of the political parties argue that the budget cuts on the innovation box should be reinvested in innovative businesses in another way. Alternatives that are mentioned vary from broadening the wage tax credit for R&D activities (the 'WBSO'), introducing certain smaller innovation incentives for SME's, directly investing in innovative businesses to easing tax rules in the field of share-based remuneration structures for innovative businesses.
In conclusion, although a lot of parties would like to cut down on the innovation box regime, two of the expected largest political parties – the VVD and the CDA – would like to maintain the current innovation box and effective tax rate or even would like to increase the budget. The innovation box has been and will be subject of political discussions. As mentioned before, the effective tax rate has been increased twice in the last four years. Whether a third increase will be proposed, or whether the system will be completely abolished, depends on the outcome of the elections and subsequent negotiations.
Other developments impacting the innovation box
Whether or not the innovation box will be impacted as a result of the Dutch elections, there are some other foreseeable changes to the tax system in the near future that will have an impact on the application of the innovation box. The tax loss compensation rules are expected to change as from 2022. In addition, it is possible that the fiscal unity regime will be replaced by a kind of group relief system in the coming years.
New tax loss compensation rules
According to the new tax loss compensation rules, annual loss compensation will be limited to 50% of the taxable profits to the extent such profit exceeds a threshold of € 1 million. This amendment also impacts the application of the innovation box as tax losses have to be fully recaptured before a taxpayer can benefit from the reduced effective tax rate of the innovation box. This means that companies whose tax loss compensation is limited under the new tax loss compensation rules, are effectively not able to apply the innovation box regime until the tax losses have been recaptured. This might especially hit innovative start-up and scale-up companies once these companies become profitable.
Fiscal unity - group relief system
The innovation box is applied at the level of the taxpayer. In case of a fiscal unity, the box will as such be applied on all the entities together. In case the current fiscal unity regime would indeed be replaced by a group relief system, each entity will in principle be subject to tax on a stand-alone basis. This could have a serious negative impact in case the qualifying intangible assets are not held by the same company that is conducting the R&D activities, as the innovation box can in principle only be applied to qualifying intangible assets which have been self-developed by the taxpayer. Based on the parliamentary process thus far, it is not expected that such major change to the Dutch tax system will enter into force before 2026.
Should you require any assistance in the application of the innovation box, or should you like to discuss how future developments may impact the application of your innovation box, please contact your trusted adviser.