Contributed by Ágata Uceda, DLA Piper Nederland N.V., as part of our ongoing Global Matters series.
Since January 1, 2011, the Netherlands has put in place a set of tax incentives that can benefit pharmaceutical and life sciences companies, among others. These incentives are referred to as “the innovation box.”
These incentives were initially introduced in 2007, but were broadened in 2010, and again in 2011. As a result of these amendments, the incentives cover a broader group of companies and situations.
Now pharmaceutical and life science companies can benefit from this incentive.
The incentives allow for qualifying profits to have an effective tax rate of 5% instead of the general tax rate of 25.5%. Key features of the incentives are as follows:
- The incentives apply to certain self-developed intangibles and the qualifying income generated from them.
- Brands, trademarks and logos are not qualifying intangibles.
- Technology-related, self-developed intangibles like new product developments, new production processes, new formulas, and the like, qualify whether or not they have patent protection.
- It is not necessary for the company to report these intangibles in its financial statements.
- The intangibles must, however, contribute at least 30% of the total profits realized from those intangibles.
- The intangibles can be developed in cooperation with other companies (for example contract R&D or cost sharing arrangements) as long as the Dutch company applying for the tax incentive is the legal owner of the intangibles.
- The incentive does not apply to intangibles acquired, with some exceptions.
- The incentive is optional and can be applied on a product-by-product basis.
To avoid companies deducting expenses at the statutory rate of 25.5% while corresponding profits are only taxed at 5%, there is a threshold. The effective tax rate of 5% applies only to the extent that the profits exceed the total development costs of the intangible asset at issue. This requires allocating income and expenses. These allocations need to be substantiated, usually with a transfer pricing study.
It is common practice for a company to discuss with the Dutch Tax Authorities (DTA) how the rules apply to each particular case. It is also possible to enter into a binding agreement with the DTA on the details of the practical application of the rules. These binding agreements make the incentive specific to a particular company and provide for certainty of common understanding.
Please feel free to contact one of our tax specialists in the Netherlands to discuss how the innovation box could apply to your company.
Contributed by Rebecca Jones McKnight and So-Eun Lee
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