Changes to the Netherlands Innovation Box: limitation on IP assets

The Netherlands government promotes engagement in research and development (R&D) activities through a preferential corporate income tax regime (i.e. the innovation box) 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 (i.e. the WBSO). In the last few months we have seen a number of legislative proposals and thoughts that significantly affect the innovation box. In this respect we have taken the liberty to post a number of blogs to clarify these measures, the envisaged changes and their impact on companies. In this first blog we will clarify the limitations (and to a certain extent even broadened scope on) qualifying IP assets for the innovation box. In subsequent blogs we will elaborate on the profit attribution, the R&D expenditure and the transition / grandfathering provisions.

The Netherlands government promotes engagement in research and development (R&D) activities through a preferential corporate income tax regime (i.e. the innovation box) 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 (i.e. the WBSO). In the last few months we have seen a number of legislative proposals and thoughts that significantly affect the innovation box. In this respect we have taken the liberty to post a number of blogs to clarify these measures, the envisaged changes and their impact on companies. In this first blog we will clarify the limitations (and to a certain extent even broadened scope on) qualifying IP assets for the innovation box. In subsequent blogs we will elaborate on the profit attribution, the R&D expenditure and the transition / grandfathering provisions.

Identifying which assets qualify for an MNA-based IP regime, such as the innovation box, is of fundamental importance. Paragraph 34 of the OECD Plan on Action 5 starts by noticing that the only IP assets that could qualify for tax benefits are patents and other IP assets that are functionally equivalent to patents if those IP assets are both legally protected and subject to similar approval and registration processes (where such processes are relevant). Based on this starting point the Netherlands government has proposed draft legislation itemizing various IP assets that should give access to the Netherlands revised innovation box. In this respect, a distinction is made between (1) small and medium-sized companies (SMEs) and (2) other taxpayers. Qualifying intangible assets in respect of SMEs (i.e. no more than EUR 50 million in global groupwide turnover and the taxpayer cannot, itself, earn more than EUR 7.5 million per year in gross revenue from all of its IP assets using a five-year average for both calculations) are self-developed intangible assets from R&D activities in respect of which “R&D wage tax certificates” from the competent Netherlands governmental agency (i.e. Ministry of Economic Affairs) have been obtained.

For other MNEs, the definition of qualifying intangible assets contains a limitation in comparison to SMEs; as an additional condition, such intangible assets should also qualify as one of the following I. patents or plant breeder’s rights; II. patents or plant breeder’s rights applications; III. software programme(s); IV. market authorization of an (orphan) medicinal or a veterinary medicinal product; V. supplementary protection certificates for medicinal products for human use, for veterinary medicinal products and plant protection products; VI. utility models; VII. intangible assets, related to intangible assets qualifying under 1., 2., 3., 4., 5., or 6.

It should also be noted that exclusive licenses to use an intangible asset qualifying in a certain way, in a certain area, or for a certain period of time are also recognized. This will benefit MNEs that typically segregate the legal ownership of intangibles from the economical ownership (i.e. development, maintenance and execution of the R&D activities).

This will however particularly benefit knowledge institutes, research centers and other companies that actively cooperate with one another (as public-private partnerships) in R&D projects. These R&D projects require an integrated approach, pursuant to which science and industry, supported by government, share their knowledge and expertise. The IP developed through these projects is governed by project agreements. Generally, several participants have taken steps regarding the invention at issue (i.e. for patents) and have an equal undivided ownership interest in the IP developed. These joint IP owners typically agree amongst themselves on the relative allocation and related rights of the IP developed. Generally, this is contractually regulated via exclusive rights to use the IP assets. If these R&D projects are set up as jointly owned companies that are recognized as non-transparent entities for tax purposes, the owners of these exclusive rights are not able to enjoy the benefits of the innovation box in respect of income earned via these exclusive rights. At best, only the lead partner that has coordinated all activities regarding the IP developed and has applied for the patent in its name can (at least) try to apply the innovation box to its proportionate income share. These problems should be solved following the application of the draft legislation.

An important benefit of the new legislation is also the introduction of software to the innovation box (as already mentioned in paragraphs 34 and 36 of the OECD Plan on Action 5). This 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. This statement will or should be welcomed by most Netherlands software companies that typically have to rely on R&D declarations, but may now also and in addition to R&D declarations rely on copyrights to support their innovation box application. Interestingly, it should be noted that the European Patent Convention, and in line therewith national patent laws, provides that software, as such, is not patentable. In practice, however, many software related inventions (that have a novel and surprising effect on a technological process) have been granted a patent. This is however not very common (we have seen it in a very limited number of situations) and we expect that a copyright protection is more appropriate.

We, NovioTax, being a research based advisory firm, are continuously working on increasing our knowledge base, and its consequences for companies doing business globally. Through research, we develop our intellectual capital. Every member of NovioTax is for instance required to participate in research activities. We believe that through the use of research we will discover new ideas and opportunities that support our clients. We are currently working on several Research Papers that will be released via our website.