First advance tax rulings for innovation box published
The Dutch tax authorities published the first three summaries of tax rulings for application of the innovation box by taxpayers engaged in international business activities on July 17, 2019. These summaries are under the revised Dutch tax ruling practice for tax rulings with an international character (“international tax rulings”) that became effective as from 1 July 2019 1. The Dutch innovation box provides for a reduced effective corporate income tax rate of 7% on income derived from a qualifying intangible asset. All three ruling requests were granted.
The summarized rulings published concern an agricultural enterprise and two service companies. All the applicants have an R&D department and develop intangible assets regularly, for which a research and development declaration (R&D-declaration) was granted. Note that an R&D-declaration is one way to access (ticket) the innovation box 2.
Central to the ruling requests is the application of the so-called peel-off method as the accepted method in determining the portion of the total profit to be allocated to the innovation box. The peel-off method is often chosen in practice in cases where innovation fulfills a core function within the business rather than a more routine or supporting function for which the cost-plus method would then be more appropriate.
Both methods are in accordance with the OECD transfer pricing guidelines and require among others a functional analysis of the taxpayer’s business to determine the various functions present in the business. Under the peel-off method first, a remuneration is carved out for the more routine functions performed, subject to ordinary taxation. Next, the remaining EBIT is allocated to the (qualifying) intangible asset based on the relative weight of the identified core functions, including qualifying R&D, not-qualifying R&D, and Marketing and Sales. This way a link is sought with the functionality of the taxpayer, which is reflected, among other things, in the position of R&D in the business and the anticipated developments therein, the fact that the intangible assets are made available through leasing, the number and quality of the (qualifying) R&D FTE and the absolute and relative level and development of operational R&D costs. Based on the information provided by the taxpayer, a profit breakdown is calculated of the taxpayer’s EBIT resulting in the portion attributable to the innovation box. This profit allocation has been agreed by the Tax Authorities in an advance tax ruling.
The tax authorities confirmed that the requirements for the requested application of the innovation box have been met.
Source: Tax Authorities of July 17, 2019, No. IBOX 1 and 2
1 Decree of 19 June 2019, 2019/13003, Stcrt. 2019, 35519,https://wetten.overheid.nl/BWBR0042342/2019-07-01, please refer also to our previous post, “Stricter requirements for Dutch tax ruling policy” https://solianabelastingadvies.com/stricter-requirements-for-dutch-tax-ruling-practice/).
2 The published tax ruling summaries can be found here: https://download.belastingdienst.nl/belastingdienst/docs/rul-20190717-ibox-000001.pdf; https://download.belastingdienst.nl/belastingdienst/docs/rul-20190827-ibox-000002.pdf; https://download.belastingdienst.nl/belastingdienst/docs/rul-20190820-ibox-000002.pdf
3 Refer to art. 12b up to and including art. 12bg of the Dutch Corporate Income Tax Act 1969