Previously we discussed an attractive additional incentive available to businesses for research and development activities − the research and development deduction (“RDA”), which will take effect as of 2012, i.e. for obligations undertaken after January 1, 2012. More information on the details of this incentive has recently become available, in particular, the draft General Administrative Order (Algemene maatregel van bestuur, AMvB) published on October 31, 2011. This memorandum discusses recent developments.
To summarize: the RDA is aimed at businesses involved, on their own account, in renewal in the area of technical issues, including software. The additional deduction is available to businesses subject to either corporate income tax or personal income tax. The size of the additional deduction for 2012 will, in all probability, be 40% of the eligible cost and expenditure, with the percentage being either increased or decreased after 2012. Neither the business itself nor the Dutch Revenue will determine whether the deduction is applicable. This will be done by Agentschap NL that will issue an RDA decision on the request, submitted in advance, by the business. A date will be specified in the issued decision. The amount stated in the RDA decision can be deducted in the financial year for tax purposes covering the date of the decision.
The RDA is only partly regulated by law. The other provisions will be regulated in subordinate legislation. Below we set out how the RDA will work in practice, thereby concentrating on corporate income tax and using currently applicable legislation as a guide. We would like to emphasize that certain elements may change as a result of the outcome of the legislative process.
The request and the RDA decision
· Running a business requires systematic planning. Before any research and development activities (“R&D”) can commence, the necessary steps must be taken, including preparing a cash projection of the cost and expenditure associated with a project. The RDA rules apply to calendar years, even for businesses with a split financial year.
· The deduction can only be requested at the same time that a request is submitted for an R&D certificate. The R&D certificate is a payroll subsidy for R&D employees that is set off against the payroll tax and social security contributions to be remitted. Both requests must be submitted to Agentschap NL. More than one request can be made each year; the current limit is three.
· A project’s expected cost and expenditure will form part of the request. Briefly put, the RDA rules define ‘expenditure’ as investment in new business assets for use in a project. Measures will be introduced to avoid multiple RDA claims for the same business asset.
· The assessment conducted by Agentschap NL will include whether the project falls under the applicable definition of R&D and whether the cost and expenditure claimed is appropriate for the qualifying project, i.e. ‘are directly attributable’.
· If the project falls under the applicable definition and the cost and expenditure meets the attributive condition, Agentschap NL will apply the prevailing percentage (2012: expected to be 40%) to the amount claimed and issue an RDA decision for the calculated amount.
· The taxpayer must provide information on the actual cost and expenditure involved within three calendar months after the end of the financial year to which the RDA decision applies. Based on this information, the RDA decision will be revised if necessary. However, an RDA decision issued for a too low amount will not be revised. If a revised RDA decision is issued, the original tax deduction will remain in place and the corrected amount must be reported as income in the year in which the revised RDA decision was issued.
Realization of the benefit
The amount stated in the RDA decision can be deducted in the financial year for tax purposes covering the date of the decision. The total amount must be claimed in that year as a one-off claim. This is possible even if the R&D project failed. Rules are in place to prevent a business getting a too large deduction if the project’s actual cost or expenditure turns out to be lower than the estimates included in the request. As is the case with the R&D certificate, a business is obliged to provide information and keep records.
The RDA is reported as an additional notional cost item in determining the taxable profit in the corporate income tax return. In respect of a revised RDA decision, the RDA is reported as a notional addition to income. A loss suffered in any year will be increased by the amount of the RDA. As such, the RDA will be included in the regular set off of losses.
Other comments
· The RDA does not apply to payroll costs, research that has been contracted out, depreciation and financing costs, and expenditure for business assets that already qualify for an energy or environmental investment deduction.
· It is expected that slightly different rules will apply to the request procedure during the start-up period at the beginning of 2012. According to the draft AMvB the start-up period will last until May 1, 2012. During this period, cost and expenditure incurred as of January 1, 2012, can be approved retroactively. As of July 1, 2012, the request procedure for an RDA decision will coincide with the request procedure for an R&D certificate.
· Joint ventures between businesses will need to be carefully set up. According to the Deputy Minister of Finance, for a request for an RDA decision submitted by two taxpayers working together in a transparent joint venture for tax purposes to be granted, both businesses must hold an R&D certificate.
· Businesses subject to corporate income tax whose R&D activities result in the successful development of new technological solutions can consider applying the innovation box (5% effective tax rate, after exceeding a threshold that is equal to the development costs). According to a Memorandum of Amendment, the tax base for the innovation box will not be decreased by the RDA. It is therefore deductible at the normal corporate income tax rate; the increased profit resulting from a revised RDA decision is also taxed at that same rate.
· The government has announced that a tax incentive will also be introduced as of 2013 for joint ventures between businesses and research institutions (public-private joint ventures): the RDA+. Currently, no specifics on the RDA+ have been published, but the Cabinet is expected to inform the Lower House about this additional incentive before the end of the year.
Follow-up
While more on the RDA is being made public, much still remains unclear. In addition to the finalized AMvB, a Ministerial Decree will be published which will contain rules on the percentage to be applied to the balance of the cost and expenditure in order to calculate the RDA amount. The government is also considering whether a forfeitary rule for smaller requests would be advisable, given that the requirement for information regarding the cost and expenditure can result in a considerable administrative burden. On November 17, 2011, the Lower House will vote on the Tax Plan 2012, of which the RDA is a part.