On May 19, 2016 the Dutch government launched a consultation on proposed changes to the Dutch innovation box regime. The proposed changes follow the recommendations made in the final BEPS 5 report issued by the OECD and recent evaluations on the working of the Dutch innovation box.

Stakeholders who want to provide input on the proposed changes must do so before June 16, 2016. As part of the consultation, a draft of the new Sections to be included in the Dutch Corporate Income Tax Act and explanatory notes were provided. Although these are draft documents and only for the purposes of the consultation, they do provide a view of where the Dutch innovation box is heading. It is likely that other countries with innovation box regimes will propose similar changes soon. New innovation box rules are planned to take effect on January 1, 2017.

Proposed amendments

The proposed Sections incorporate important changes to the innovation box in line with BEPS 5, with the nexus approach and the narrowing of the definition of qualifying IP being the most significant changes. The effective tax rate for income attributable to the innovation box remains unchanged at 5%.

Our initial observations on the drafts are summarized below:

With regard to qualifying IP:

  • The definition of qualifying IP is in accordance with the BEPS 5 report and depends on the size of the taxpayer’s business. A taxpayer is small if its five-year average group turnover is less than EUR 50 million per annum and the five-year average benefits from IP are less than EUR 7.5 million per annum. Companies that exceed these thresholds are qualified as large.
  • For small taxpayers, qualifying IP has been defined as self-developed IP for which a WBSO subsidy has been granted. The question that then arises for small taxpayers owning qualifying IP is whether such IP was, for example, patented but not developed with the aid of a WBSO subsidy.
  • For large taxpayers, qualifying IP is defined as IP that has been self-developed with the aid of a WBSO subsidy and for which a patent, breeder’s right or certain pharmaceutical certification has been granted. This represents a significant change as currently these taxpayers could qualify if either a patent, breeder’s right or WBSO subsidy was granted.
  • For large taxpayers, software is also specifically mentioned as qualifying IP if developed with the aid of a WBSO subsidy. This is an important safeguard, as in practice software is rarely patented and typically relied on a WBSO subsidy as “entry-ticket” to the innovation box.
  • An exclusive license on a patent, breeder’s right, pharmaceutical certification or software may also qualify, which is a welcome improvement to the current rules.
  • Our initial conclusion is that large taxpayers should check to see whether they meet the definition of qualifying IP and if not, how they can ensure they meet the new definition going forward. The most important conclusion in this respect is that it is no longer sufficient for large taxpayers to have only patents or similar rights; they will also be required to develop the respective IP with the aid of sufficient WBSO subsidies.

With regard to income eligible for the innovation box:

  • Pursuant to the BEPS 5 report, changes to the Dutch innovation box rules are being proposed to reflect the fact that acquired IP and IP developed with significant assistance from group companies on a contract research basis does not qualify for the innovation box (referred to as the “nexus approach”).
  • Outsourcing of R&D activities to third parties or within a Dutch tax group should not be affected by the nexus approach. Technically, the following amendments are being proposed:
    • the income to be allocated to the innovation box is multiplied by a fraction which is made up of Total Qualifying Expenditure multiplied by 1.3, divided by the Total Expenditure incurred for the development of the Qualifying IP.
    • Qualifying Expenditure is all expenditure directly incurred for the development of the IP, with the exception of expenditure incurred for outsourcing R&D to group companies and indirect costs such as housing and financing costs.
  • The methodologies for allocating income to the innovation box have not changed and it has been laid down in a general provision that the allocation of income to the innovation box should be based on the specific circumstances of the taxpayer.

With regard to administrative requirements:

  • The proposed rules introduce a documentation requirement for taxpayers, i.e. all information relevant to determining the allocation of income to the innovation box must be retained.
  • Our initial observation is that this documentation requirement already exists to a large extent within the current rules and ruling practice. Nevertheless, the codification of this requirement is an additional administrative burden.


A grandfathering period will apply until July 1, 2021 for all IP which was developed before July 1, 2016. This means that the current rules will continue to apply to such IP for a period of five years. All IP developed after July 1, 2016 will automatically fall under the new rules and will therefore be subject to the narrowed definition of qualifying IP and the nexus approach. Specific grandfathering rules will also apply to the new administrative requirements.

A specific rule is introduced for patented IP or breeder’s rights developed before January 1, 2017. These will continue to qualify for the innovation box without a time limitation, even if they do not meet the definition of qualifying IP. In specific circumstances this could mean that it would be worthwhile obtaining a patent or breeder’s right before January 1, 2017.

Way forward

Although the proposed legislation is still subject to consultation and by no means final, it is likely that elements such as the modified nexus approach and the definition of qualifying IP will be implemented, given the consensus already reached on these topics in the BEPS 5 report. These changes may have a significant impact on the benefit that taxpayers can enjoy from the innovation box in the future, even in cases where tax rulings are valid beyond January 1, 2017. With respect to tax rulings, we recommend that you confirm their continued validity after the changes to the innovation box become effective (as changes in the relevant rules and regulation may render a ruling invalid).

Our innovation box specialists would be pleased to discuss with you the potential impact of these rules for your company and identify which steps can be taken in response.

Click here to download the memorandum in pdf format