Stepping up the tax facilities for innovative business

The government has scaled up a tax facility created in 2007 for innovative businesses operating in the Netherlands.

The tax facility already applied to certain self-developed intellectual property that is patented or for which a plant breeders’ right has been obtained. If at least 30% of the profit can be attributed to the patent or the plant breeders’ right, an effective Dutch corporate income tax rate of only 5% applies to all income that can be allocated to the qualifying intellectual property. To accommodate the fact that the application procedure can take a long time (particularly for patents), the tax facility had already been broadened to include patented intangible assets or plant breeders’ rights as of the application date of the patent or plant breeders’ right.

The qualifying intellectual property now also includes research and development (R&D) activities, such as those aimed at technological developments of new physical products, physical production processes or software or technical research. An annual percentage is set at which R&D costs and expenditures can be deducted.

For 2012 the qualifying R&D costs and expenditures that can be deducted must be multiplied at 40%. With a maximum corporate income tax of 25%, the maximum net additional corporate tax benefit could be up to 10%.

The application procedure will be set out in an implementing regulation that is due to take effect from 1st January 2012. According to a preliminary draft of 31st October 2011, the R&D deduction will apply only to costs and expenditures that are directly related to qualifying R&D activities for which obligations have been entered into after 1st January 2012. Furthermore, these costs and expenditures should stem from R&D activities for which an R&D certificate has been granted by Agentschap NL, an agency of the Ministry of Economic Affairs. Certain categories of cost, such as financing costs and depreciation costs, are specifically excluded from the R&D deduction; only expenditures that concern paid, new and previously unused capital assets will be taken into account.

This upgraded tax facility adds to an existing employment tax deduction for qualifying R&D activities. For 2012 the R&D employment tax discount should amount to 42% of the first €110,000 in R&D-related labour costs (60% for start-ups) and 14% over the remaining costs.

Together with the beneficial tax regime for royalty income, the changes should make the Netherlands more attractive for innovative businesses that substantially invest in R&D or that wish to establish licensing activities in the Netherlands. The Netherlands is a signatory to many double taxation treaties and to the major international IP treaties.

The Tax Plan 2012, which implements these changes, must now be adopted by the Senate; this is expected to happen by mid-December 2011.