2 February 2016

Changing administrative guidelines for Innovation Box

The Innovation Box is changing. Apart from the amendment of a number of definitions, the guidelines to determine which innovation is eligible for beneficial tax treatment have also been altered. The connection between innovation expenditure and innovation profit is becoming increasingly important.

With the new guidelines the Organisation for Economic Cooperation and Development (OECD) intends to prevent the misuse of schemes such as the Innovation Box for tax avoidance purposes. The OECD holds the view that this will work if the ꞌmodified nexus approachꞌ is introduced by 1 July2016 at the latest. This approach will mean that the development costs of new innovations will be taken into account when calculating the amount of tax benefit that can be gained from the Innovation Box. The consequence of this is that companies that make use of the Innovation Box, or are planning to do so, will have to be able to effectively account for the innovation expenditure incurred. They will have to demonstrate on the one hand what their own innovation activities have cost; on the other, they will also have to demonstrate the cost of innovations or partial innovations they have bought and/or the cost of development and other activities outsourced to related or other parties.

Separate accounting

It is important to start accounting for development and other expenditure separately from now on to ensure that you have a clear idea of the various costs during negotiations with the Dutch Tax and Customs Administration about the Innovation Box. Make sure that you clearly identify whether this expenditure was incurred for development by your own company or for outsourcing that development. Expenditure incurred for purchasing innovations or partial innovations and/or the cost of outsourcing development activities to a tax-paying related party does form part of the total production costs (ꞌdivisorꞌ), but is not part of the qualifying production costs (ꞌnumeratorꞌ).