Netherlands: Revised Netherlands innovation box applied to software companies
Patrick T F Schrievers
The Netherlands government is promoting engagement in research and development (R&D) activities through a preferential corporate income tax regime and specific R&D tax incentives granted to employers with regard to salaries paid to employees who carry on qualifying R&D activities and related capital expenditure.
This note describes developments in relation to amendments as of January 1 2017, from when the new rules for the Netherlands innovation box regime entered into force. They apply to fiscal years commencing on or after this date.
Following international scrutiny (especially from Germany), preferential IP regimes in the Netherlands have been amended with a cut-off date of June 30 2016 in line with BEPS Action 5. The new Dutch innovation box follows the internationally approved standards under BEPS.
This plan has been derived from a bilateral agreement between the UK and Germany that was referred to as the "nexus approach".
Under the revised innovation box regime, a tax rate of 5% is imposed on income generated by qualifying intangibles to the extent that the income from the intangible exceeds the related R&D expenses.
Briefly, the new (detailed) rules preserve that companies that apply the new innovation box have performed substantial R&D activities, that eligible R&D profits are related to patents or other IP rights that are capable of being registered and that the profit allocation is sufficiently documented.
Interestingly, the new rules may, however, provide benefits to software companies. The definition of qualifying intangible assets includes software programs that are capable of being protected via copyright legislation. This provision confirms that copyrighted software shares the fundamental characteristics of patents, since such software is novel, non-obvious and useful and it is unlikely that core software developments will be outsourced to unrelated parties.
The extended application of the Netherlands innovation box has been welcomed by most Netherlands software companies that typically have to rely on R&D declarations, but may now also rely on copyrights to support their innovation box position.
Interestingly, the Netherlands has used the term "programmatuur" to define software in the revised legislation. At first glance, and based on the wording, this definition seems to limit the software definition. This is, however, somewhat unclear. Nevertheless, this is an important remark taking into consideration the fact that this term (i.e. "programmatuur") is mentioned in the R&D wage tax credit (which also functions as a starting point for the innovation box) that is granted by the Ministry of Economic Affairs. We expect that we will see some discussion with the Dutch tax authorities who may want to limit the definition of software.
In respect of R&D profit calculation, the revised Netherlands innovation box regime provides that qualifying income is determined per qualifying intangible asset or per coherent group of qualifying intangible assets (tracking-and-tracing). In the case of software companies, we typically identify templates or particular groups of programs. If it is not possible to apply the tracking and-tracing method, the method for determining the qualifying income will be established by taking into account the nature of the business enterprise and the R&D activities of the taxpayer. Observing the difference with the main methods used under the current innovation box regime to determine qualifying income (which commonly uses the profit split method) we expect an increase in the administrative burden for software companies, as well as the Netherlands tax authorities.
Patrick T F Schrievers (firstname.lastname@example.org), Nijmegen
Tel: +31(0) 6 10 24 61 40 and +31(0) 24 352 96 90