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Flat-Rate Method for the Innovation Box; How Does It Work?

100-aan-activiteit-dienstbare-grond-is-geen-keuzevermogen
Picturesque church Den Hoorn a small village on the wadden islands Texel in the Netherlands

In this article, we provide a high-level overview of the flat-rate scheme of the Dutch innovation box regime in the Dutch corporate income tax act. The benefits of the ‘regular’ innovation box can exceed those of the flat-rate scheme, but the process of application of the regular innovation box is generally more lengthy and expensive. For many Dutch corporate income taxpayers, the flat-rate scheme for the innovation box offers a straightforward tax saving.

Innovation Box in General

The innovation box is, in short, a provision in the Dutch Corporate Income Tax Act that allows for profits derived from certain innovative activities to be taxed at a significantly lower rate. The innovation box is exclusively available for Dutch corporate income tax payers. E.g., for limited liability companies (in Dutch: ‘besloten vennootschap’ or ‘BV’) and not for entrepreneurs subject to personal income tax (such as sole proprietorships). It applies to benefits derived from so-called ‘qualifying intangible assets’ that are self-developed by the taxpayer, typically a BV. The aim of the scheme is to promote innovation in the Netherlands. For more information regarding the application of the ‘regular’ innovation box regime, see also this article.

Benefits of the Innovation Box

Instead of the general Dutch corporate income tax rate of up to 25,8% (2024 and 2025), benefits from qualifying intangible assets are in principle effectively taxed at only 9% (2024 and 2025) or even less as described below.

Entry Ticket to the Innovation Box

The reduced rate in the innovation box generally applies only to benefits from qualifying intangible assets created by the taxpayer. Since January 1, 2017, a distinction has been made between smaller taxpayers and others (i.e., larger taxpayers). Whether a taxpayer is classified as large or small depends on the turnover (of the group) of the taxpayer and the amount of benefits derived from intangible assets for which a Research & Development (‘R&D’) statement has been issued.
For smaller taxpayers, the entry ticket to the innovation box is that the intangible assets must originate from R&D activities for which the taxpayer has been granted an R&D statement. The R&D declaration, which stems from the Dutch Research and Development Promotion Act (In Dutch: ‘Wet Bevordering Speur en Ontwikkelingswerk’ or ‘WBSO’), is a tax incentive in the form of a reduction in Dutch payroll taxes owed. The reduction is determined based on the hours spent on R&D activities by in-house employees and the costs and expenses necessary to perform such work. The R&D declaration is issued by the Netherlands Enterprise Agency (in Dutch: ‘Rijksdienst voor ondernemend Nederland’ or abbreviated ‘RVO’).

For larger taxpayers, in addition to the R&D declaration for an intangible asset resulting from R&D activities, a second entry ticket is required. For example, a patent or breeder’s right must be granted to or applied for by the taxpayer, or the intangible asset must take the form of software.

Flat-Rate Scheme

Since January 1, 2013, the so-called ‘flat-rate innovation box scheme’ has been introduced. This scheme is primarily intended to encourage small and medium-sized enterprises (SMEs) to utilize the Dutch innovation box. Applying the innovation box can be complex, which has deterred SMEs from taking advantage of the scheme. However, the flat-rate scheme is simpler to use, by applying for the application it in the Dutch corporate income tax return (if the requirements are met).

Dutch corporate income tax payers (e.g., a BV or NV) can use the flat-rate innovation box scheme to include an amount equal to 25% of their profits, up to a maximum of €25,000, in the innovation box. For a taxpayer taxed in the first bracket of the Dutch corporate income tax (19% rate for profits up to €200,000 in 2024 and 2025), the maximum benefit under the flat-rate scheme is €3,094 in 2024 and 2025. The calculation is as follows: €25,000 is considered for 9/25,8 of the total and taxed at 19% = €25,000 x 9/25.8 x 19% = €1,656. Without application of the flat-rate innovation box scheme, the entire amount would be taxed at 19% = €25,000 x 19% = €4,750. The Dutch corporate income tax saving is €3,094, making the effective tax rate 6,6%.

For a taxpayer in the second Dutch corporate income tax bracket (25.8% for profits above €200,000 in 2025), the maximum benefit under the flat-rate scheme is €4,200. Calculation: €25,000 is considered for 9/25.8 and taxed at 25.8% = €25,000 x 9/25.8 x 25.8% = €2,250. Without the flat-rate innovation box scheme, the entire amount would be taxed at 25.8% = €25,000 x 25.8% = €6,450. The Dutch corporate income tax saving is €4,200.

The flat-rate innovation box method can – briefly put – only be applied to profits from qualifying intangible assets created by the taxpayer in the current year or one of the two preceding years. As with the regular innovation box, the intangible assets must originate from R&D activities for which the taxpayer obtained an R&D statement. For larger taxpayers, a second entry ticket is required in addition to the R&D statement.

Taxpayers may use the flat-rate scheme for up to three years for a specific intangible asset. Development costs of the intangible asset do not affect the application of the innovation box during this period but may play a role afterward. The flat-rate scheme only applies to positive profits and cannot be combined with the regular innovation box. Special attention is required in cases of overlap or succession between the flat-rate and regular innovation box. For instance, if a taxpayer created a qualifying intangible asset in 2020, the flat-rate scheme could be applied for 2020, 2021, and 2022. In 2023, the taxpayer could switch to the regular innovation box for the same asset if it still generates benefits and all other conditions are met. It is possible to conclude an agreement with the Dutch tax authorities in this regard. Please note that situations where a fiscal unity for Dutch corporate income tax applies the flat-rate innovation box scheme should be carefully reviewed in case a company is deconsolidated from the Dutch corporate income tax fiscal unity.

Requesting the Flat-Rate Innovation Box

The (flat-rate) innovation box is not applied automatically. A taxpayer must opt for the application of the innovation box in the Dutch corporate income tax return for the relevant year.
For the regular innovation box, a tailored agreement is usually concluded with the Dutch Tax Authorities, a process with which we have extensive experience.

Administrative Obligations

Taxpayers applying the innovation box must meet specific (additional) administrative obligations. The taxpayer’s records must demonstrate, among other things:
1. Ownership of one or more qualifying intangible assets developed by the taxpayer.
2. The amount of benefits derived from these qualifying intangible assets.
3. The most appropriate method for determining the benefits from these intangible assets.
Additionally, smaller taxpayers must maintain records proving their classification as smaller taxpayers.

Conclusion and Considerations

In addition to the innovation box, there are other Dutch tax incentives to promote innovation, and we have extensive experience with these as well.
Do you have any questions about the WBSO or the innovation box? Interested in a free quick scan to see if you can apply the innovation box? Feel free to contact Twan Weusten ([email protected] or +31 6 82 53 57 13)

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