The Innovation Box

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The Innovation Box regime in the Netherlands is a tax relief scheme that allows companies to pay a reduced corporate income tax rate of 9% on profits derived from technical innovation, specifically self-developed intangible assets.
What are the main aims and objectives?

The main aims and objectives of the Innovation Box regime in the Netherlands are to encourage successful innovations and intellectual property development by providing reduced tax rates on income derived from qualifying IP assets. Additionally, it seeks to promote activities related to investments in the country. It is specifically designed to support companies that generate profit from self-developed intangible assets, fostering an environment conducive to research and development (R&D). This, in turn, aids in reducing wage taxes on R&D activities, leading to a lower Effective Tax Rate, higher free cashflows, and an increase in the company's value.

How does the program work?

The Innovation Box regime provides a preferential corporate tax rate of 9% - reduced from the regular rate of 15%-25% - in order to incentivize companies to engage in innovative activities and invest in novel technologies.

To qualify for this regime, companies must meet a few key criteria. First, they need to apply for the R&D tax credit scheme in the Netherlands. Second, the company should be involved in the development of the innovation themselves. Thirdly, it is required that the taxpayer has developed one or more intangible assets as a result of research and development (R&D). Lastly, the profits derived from the innovation must exceed the costs of its implementation. If the taxpayer does not qualify as a SME, additional patents may be required in addition to the R&D statements.

Taxpayers need to maintain comprehensive records demonstrating their ongoing eligibility and compliance with the scheme's requirements. The tax authorities periodically review the taxpayers status to ensure ongoing compliance with the regime.

The proceeds of the tax relief are limited to how a company divides its R&D process between its own department and outsourcing. Only the innovations that are developed inhouse are eligible for tax relief. Otherwise, the benefits are calculated based on a mathematical system called “modified nexus approach”.

The regime distinguished between small and larger tax payers that have more than €50 million gross sales worldwide per year. To qualify for the regime, larger tax payers must have benefits from their intellectual property that exceed €7.5 million per year.

What is the overall cost?
The regime represents a national reduction of corporate income tax intake of €0.5 billion per year.
How was it implemented?

The Innovation Box regime was introduced in 2007 by the national government of the Netherlands and was one of the first tax incentive programs of its kind. The regime initially focused on providing a reduced tax rate on income from patents, with a rate of 5%. However, as the scheme has developed, political pressure has resulted in the effective rate being increased to 7% in 2017 and 9% since 2021.

Due to concerns raised by the OECD BEPS project, the regime was amended in 2017. The purpose of this was to tighten the rules in order to prevent abuse by multinationals. Substance and nexus measures were introduced as well as complementary legal ticket requirements. In particular, the OECD was concerned that differences between different national regimes could result in tax avoidance.

What impact has been measured?

An academic study of Innovation Box regimes that included the Netherlands, found there was evidence of increased investment and employment as a direct result of the programs implementation. However, the study also found evidence of income shifting by companies to avoid taxation.

A specific study of the Netherlands regime found that the policy had boosted R&D investment.

What lessons can be learned?

The regime has also faced criticism for potentially facilitating profit shifting and tax avoidance, leading to changes in its structure and eligibility requirements. For instance, only in-house innovations are now eligible for the benefits, and a research and development declaration is required. These changes have had both financial and administrative impacts on companies benefiting from the innovation box.

There have also been debates about the benefits of the regime, with some arguing that multinationals benefit more than SMEs, start-ups, and scale-ups. These debates have influenced political discussions, with some parties even proposing to abolish the regime.

In particular, the regime has proven to be politically controversial with several parties campaigning to abolish it entirely and while others have campaigned to substantially reduce the benefits. In particular the Socialist Party filled a motion in Parliament requesting the complete abolition of the regime in 2019 which was just 11 votes short of passing.

CURATED BY

Tom Hancock

Research Associate
Global Entrepreneurship Network
United Kingdom