The Innovation Box: additional tax benefits for innovative entrepreneurs

What exactly is the Innovation Box and how big is the potential benefit?

The Innovation Box is a tax incentive for companies, whereby the profit generated by innovative activities may be taxed at a lower rate of corporation tax. The benefit increases as more profit is made and a larger part of the profit can be attributed to the core function of R&D. The relevant profit from in-house R&D qualifies for the innovation box as soon as the costs associated with the innovation have been fully recovered. If that has been achieved, only 9% corporate income tax has to be paid. Compared to the marginal rate of 25%, this translates into a tax benefit of 16 cents for every additional euro of profit from in-house R&D.

Which companies are eligible for the Innovation Box?

Since 2017, the Tax Authorities have made a distinction between smaller and larger taxpayers. For smaller taxpayers, a WBSO decision (S&O statement) is sufficient to gain access. Larger taxpayers should, in addition, have a second ticket in the form of a registered utility model to protect innovation, such as a patent, plant breeder's right, software, or pharmaceutical license.

Useful to know: larger taxpayers are characterised by a group turnover in excess of € 250 million over the past five years or a gross benefit from R&D in excess of € 37.5 million.

What is also the most important condition for application of the Innovation Box?

The most important condition is that the innovation is (partly) developed for own account and risk. Only in that case it is possible to substantiate that the created intangible asset has been generated independently and that one owns the intellectual property.

What is the best way to benefit from the Innovation Box?

When filing the corporate income tax return, a choice has to be made between two options: the flat-rate approach or a substantiated amount of the qualifying Innovation Box profit. In both cases, there is effectively a tax base reduction. Whereas the basis reduction for the first option is limited to a maximum amount of € 25,000 and a term of 3 years, this limitation does not apply to the second option. For this option, however, an agreement must be made with the tax authorities. Such a tailor-made agreement is then recorded in a settlement agreement, also called a ruling. By concluding a ruling, certainty can be obtained in advance about the specific calculation method and the number of years for which this method may be used.

Companies with a one-off relatively small innovation and a profit expectation of up to approximately € 200,000 per year can usually do well with the flat-rate approach. Exceptions to this are companies that for the most part consist of R&D or make continuous use of the WBSO scheme. For these companies and companies with a profit forecast exceeding € 200,000, it is worth investigating a tailor-made ruling.

What is the maximum duration of a ruling and can it be extended upon expiry?

When concluding a ruling, the Tax Authorities may bridge a maximum of three future years. A ruling concluded in 2021 can therefore run until 2024. For years in the past, the Innovation Box may, in principle, still be applied to all years for which the corporate income tax return has not yet been finalised.

When an existing ruling expires, an extension request can be submitted and a new ruling for several years can be concluded. An inventory of the innovative activities within the organisation will then again be made in order to check whether and to what extent the profit resulting from these activities still qualifies. In 2017, for example, the legislation was changed and it was determined that innovations from before 2017 do not qualify again and are given until no later than mid-2021 to grow. Of course, this does not apply to any further developments that were made after 2017 by means of a WBSO project.

At what point is it best to start an Innovation Box project?

As soon as profit is made with the innovation, it is wise to map out the possibilities. If you choose for the lump sum approach it is important to make sure that all conditions and administrative obligations are met. Practice shows, however, that in most cases it is more advantageous to conclude a ruling. In order to obtain more clarity on this, we are happy to perform a feasibility analysis in which several scenarios are compared with each other. Based on this analysis, a well-considered decision can then be made whether or not to submit an innovation box application to the tax authorities. Translated with www.DeepL.com/Translator (free version)

1. Ten eerste is het van essentieel belang om de Innovatiebox tijdig te claimen! Dit kan door pro forma 1 euro in te vullen bij de Innovatiebox. Hiermee wordt voorkomen dat de Belastingdienst de aangifte definitief vaststelt en geen aanspraak meer kan worden gemaakt op de Innovatiebox.
2. In het algemeen geldt: hoe directer het verband tussen de WBSO en de winst die hieruit voortkomt, hoe eenvoudiger het is om overeenstemming te bereiken over toepassing van de Innovatiebox. Wanneer bijvoorbeeld sprake is van gescheiden entiteiten voor ontwikkeling en verkoop van de innovatie kan dit ervoor zorgen dat het voordeel sterk wordt beperkt. Het vormen van een fiscale eenheid voor de vennootschapsbelasting biedt in zo’n situatie vaak een veel betere uitkomst.
3. Indien een deel van de R&D activiteiten wordt uitbesteed aan een buitenlandse vestiging dient eerst nog een zogenaamde nexuscorrectie plaats te hebben voordat de winst uit eigen R&D kan worden bepaald. Voor de berekening hiervan is het noodzakelijk om inkoop facturen te overleggen. Door R&D activiteiten apart te specificeren kan worden voorkomen dat de gehele factuur als uitgangpunt wordt genomen door de Belastingdienst.