Transfer Pricing Implications Of Innovation Box Regime - To Be Introduced in 2010 by the Dutch Ministry of Finance
Amsterdam, December 2009 - As from 1 January 2010 investment in technological innovation will to a larger extent qualify for the so-called innovation box regime under proposed changes to the current patent box regime.


AMSTERDAM, THE NETHERLANDS, December 17, 2009 /24-7PressRelease/ -- The changes are expected to be effective as from 1 January 2010.

If the innovation box regime becomes applicable as expected, applicants may be allowed to claim a fictitious costs deduction equal to 80% of the profits obtained in connection with innovative operations. Effectively, this means that the corporate income tax rate will be reduced to 5% on such profits. Another major change is the elimination of the Euro 400,000 cap which applied to the patent box regime.

The use of the innovation box regime is optional and may be applied for individual assets. Once an election for the regime has been made, opting out is not possible except for sale of the intangible asset(s) involved. The innovation box regime is not applicable to acquired assets but is applicable in respect of further development activities relating to such acquired assets.
Profits should be derived and must therefore be properly allocated to qualifying assets. There is no prescribed remuneration format. Apart from royalty proceeds, profits obtained from sale or service operations will qualify too.

The innovation box regime replaces the patent box regime under which a deduction was limited to profit related to
patents.

Losses incurred in connection with qualifying intangible assets are still deductible against the regular corporate income tax rate of 25.5%. A recapture of losses so deducted is required, i.e. qualifying profits will fall within the ambit of the 5% rate only to the extent they exceed prior losses.

As to the scope of qualifying assess a number of points have been clarified by the Administration.

1. There is a wage tax credit facility, also qualifying with respect to non-patentable R&D, if an "R&D declaration" has been obtained (a declaration for Speur-& Ontwikkelingswerk). Such R&D declaration may be used to qualify resulting intangible assets for the innovation box;
2. It has been confirmed that software assets and business secrets fall within the scope of the innovation box regime. However, the regime is confined to assets of a technical nature, and trademarks and other marketing intangibles do not qualify;
3. Innovation is not restricted to R&D but may be connected with improvements relating to manufacturing process know-how;
4. Operations concerning innovation projects may be outsourced within or outside of the Netherlands and within or outside the group of companies of which the taxpayer is a member.

Functional analysis should focus on qualification requirements. The Deputy Minister of Finance has promised to introduce guidelines for the computation of profits derived from intangible assets for which the innovation box regime election was made. However, a clear statement has been made that a residual profit method, on the strength of which the residual profit after first allocating appropriate returns to other assets and/or operations will be imputed to qualifying assets, must be applied.

For further information on the transfer pricing aspects of the innovation box regime, please contact:

Steef Huibregtse
s.huibregtse@tpa-global.com
+31 20 462 3533

Louan Verdoner
l.verdoner@tpa-global.com
+31 20 4623530

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