In order to create a more attractive R&D environment, the Netherlands introduced a Patent Box regime in 2007. Due to the restrictive nature and the complexity of the regime, Dutch taxpayers never wholeheartedly embraced it. Understanding some of the regime’s shortcomings, the Dutch Ministry of Finance introduced an improved version, simultaneously changing its name to “Innovation Box” in January 2010.
In cases where the Innovation Box is applied, profits achieved through qualifying innovative work are subject to corporate income tax at a rate of merely 5%, instead of the normal rate of 25.5%. Income qualifying for the reduced tax rate comprises all economic benefits derived from the intangible, including profits from products, royalty income and capital gains.
Qualifying innovative work includes self-developed patented intangible assets (not acquired; although 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) or qualifying R&D activities for which an R&D statement (“S&O Verklaring”) has been obtained from ‘Agentschap NL’, an executive part of the Dutch Ministry of Economic Affairs. Consequently, companies that do not intend to apply for patents for the products of their R&D efforts, or that develop products that are not patentable, such as software related intangibles and trade secrets, can also apply the Innovation Box.
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.