We expect the caution to lift as the year 2023 progresses
Ahead of our predictions and commentary by sector, investor type and theme, we offer in our Dutch M&A Predictions 2023 report a quick overview of the Dutch Mergers and Acquisitions market as we see it now, setting the scene for more detailed observations.
2023 Dutch M&A outlook
In our Predictions report for 2023, we see a marked contrast to the picture last year, when markets had more certainty and overall confidence. We suspect the Ukraine war and associated geopolitical events have dampened the Dutch M&A market by about 30% in overall volume from the post-COVID peak, but there remain pockets of vibrant activity – particularly in sectors such as life sciences, health care, technology and energy – and the fundamentals for continuing M&A activity remain in place. Within the less buoyant sectors, those tied to consumer spending are the most affected by recent economic events.
Download the full report here
Our findings
Of those economic factors, our research shows that rising interest rates; labour shortages; volatile equity markets; PE dry powder; and market disruptors such as the switch of business models towards digitisation and technology deployment are the most influential, rather than, say, inflation. With ample capital in reserve, sufficient stock market strength and acceptable interest rates, we can be confident that transactions will continue to take place, albeit at a lower level than in the post-COVID M&A era. There may be some initial hesitance in completing transactions, and more recourse to one-on-one deals and alternative structuring and financing methods, but we expect the caution to lift as the year progresses, so long as no further economic or geopolitical shocks occur.
Download the full Dutch M&A predictions 2023 report here or via the button and read more about the opportunities for you and your company in the Dutch Mergers & Acquisitions market.
In this update we look back on the key legislative and case law moments of the past six months. We also look ahead, providing an overview of new employment legislation and regulations effective from 1 January 2023, new benefit amounts, state pension ages and anticipated laws and regulations.
Please be aware that at the moment of finalising this update a few matters which, strictly speaking, should be treated as 2022 matters had not been published yet by the relevant authorities.
If the information in this update prompts any questions, do not hesitate to get in touch with one of our specialists.
Amidst the general uncertainty in the world, one thing you can rely on is our December predictions for the year ahead. This year, we look at tech trends and developments and their impact on the law, with a focus on Web3 and the metaverse. We also predict the key issues and developments in data and life sciences, and consider whether 2023 will really see the end of the influence of EU law in the UK.
You may have heard about Pillar Two, and you may have also heard that the Netherlands, as the first country in the EU, published Pillar Two draft legislation on October 24th, 2022. This draft will now be updated following a round of public consultation, after which the amended draft legislation will be presented to the Dutch Parliament, with the aim to get it implemented and effective by the start of 2024. Now you may be wondering what this is all about, if and when this is actually going to happen, and whether you should care – below we summarize, visualize & cover some FAQs on Pillar Two general systematics and the Dutch draft rules.
FAQs: Pillar Two in general
What is Pillar Two again?
Pillar Two is part of a two-pillar solution resulting from the OECD’s BEPS Action 1 (set back in 2015), calling to address the tax challenges arising from the digitalization of the economy. Per October 2021, over 135 jurisdictions have signed on to the statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy, to reform the international tax system in light of this ongoing increasing digitalization.
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In short, Pillar One aims to realign taxing rights towards ‘market jurisdictions’ where MNEs lack a physical presence, and Pillar Two aims to ensure that a minimum level of tax is paid, addressing the challenges of the digitalizing economy where the relative importance of intangible assets as profit drivers may still leave room for profit shifting planning.
What are the basics of Pillar Two?
To put it in a nutshell (with reference to the following questions for further details):
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What is Pillar Two trying to achieve?
Pillar Two is designed to ensure that MNEs pay a minimal level of tax in every jurisdiction in which they have a taxable presence, therewith also lowering the incentive for MNEs to ‘shift’ profits to lower tax jurisdictions, for example through moving IP or other tangible assets to those jurisdictions. The minimum level of tax is set at a rate of 15% over a ‘common’ tax base determined based on the Pillar Two rules.
Where do we stand today?
While originally presented as a combined ‘two-pillar solution’, the implementation of each Pillar is now following a different track and it seems likely, at least in a number of jurisdictions, that implementation will take place separately. In December last year (2021), the OECD/IF released its first draft of the Pillar Two ‘Model Rules’, closely followed by the European Commission releasing its (largely similar) draft Pillar Two Directive. These drafts, once finalized, are meant to serve as a template for the implementation into domestic law.
Although Pillar Two was initially back on the agenda for the last Ecofin meeting on December 6th, 2022, the draft EU Directive has still not been adopted, as the required unilateral agreement by all EU Member States has not yet been reached. Recently, however (September 2022), a joint statement was issued by the governments of France, Germany, Italy, the Netherlands, and Spain, reconfirming their commitment to the implementation of the global minimum tax (essentially Pillar Two). Following that statement, as mentioned, the Netherlands is now the first of these five to have published its draft Pillar Two legislation, with intended implementation for financial years starting on or after 12/31/2023.
Will it apply to me?
The Pillar Two rules apply to entities that are part of an MNE Group with an annual revenue of at least EUR 750 Million based on an Accepted Financial Accounting Standard(similar to the threshold for the existing Country-by-Country Reporting or ‘CbCR’ rules). To be in scope, the Ultimate Parent Entity (‘UPE’) of the MNE Group must meet the revenue threshold on a consolidated basis for at least two of the four years immediately preceding the relevant fiscal year. The UPE is described as an entity that has a Controlling Interest -directly or indirectly- in any other Entity (and is itself not owned -directly or indirectly- by another entity with a Controlling Interest in it). A Controlling Interest is a recurring term in the Pillar Two rules and is defined as an Ownership Interest in an Entity for which the interest holder is -or would have been- required to consolidate the assets, liabilities, income, expenses, and cashflows of the Entity. In addition, a Main Entity is deemed to have the Controlling Interest in its Permanent Establishments, based on which the Model Rules also apply to companies with Permanent Establishments in one or more jurisdictions. Certain entities, such as NGOs, Investment Funds, and Pension Funds, are excluded from the Pillar Two rules.
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How is the ETR for Pillar Two calculated?
The ETR of an MNE under Pillar Two rules is determined by dividing the amount of ‘Covered Taxes’ by the amount of income as determined under the Pillar Two rules. In short, Covered Taxes include any tax on an entity’s income or profits (including a tax on distributed profits) and include any taxes imposed instead of a generally applicable income tax. Covered taxes also include taxes on retained earnings and corporate equity. The MNE’s income is calculated starting with the standalone financials of group entities (or permanent establishments) determined under the same accounting standards as the consolidated financial statements at UPE level, i.e. the Financial Accounting Net Income before consolidation to eliminate intra-group transactions. Subsequently, certain adjustments (some mandatory, some elective) are to be made in order to align the determination of the income base better with common (tax) standards.
Once the Covered Taxes, as well as the (adjusted) income (or loss), has been determined under the Pillar Two rules, these amounts are grouped for all in-scope entities (or permanent establishments) within the same jurisdiction (with certain consolidation eliminations for income/loss of entities in tax groups in the same jurisdiction) to eventually determine the Pillar Two ETR for that jurisdiction. Note that when calculating the ETR, the taxable income for a jurisdiction may be lowered with a substance-based carve-out (a percentage of payroll costs and tangible asset value) to allow for a fixed return for ‘real economic activity’ to be out of scope.
Finally, the amount of Top-Up Tax for each group entity is equal to the difference between the ETR and the minimum ETR under the Pillar Two rules, multiplied by the adjusted income of the group entity.
So why can’t I just use my existing ETR calculations?
Although these can be a good starting point, the ETR for purposes of the Pillar Two rules may be different in some cases as it is calculated based on a new set of rules determining which income (or loss) and which taxes should be taken into account as described above.
To get into the details a bit – the rules based on which we determine what goes into the ETR calculation in terms of taxes and income for Pillar Two purposes are different from the rules used for the existing ETR calculations. And although there are quite some similarities, there can also be some differences that could lead to a different ETR for Pillar Two, for example:
A different starting point is used for determining the taxable income – i.e. the commercial financial numbers for each in-scope entity (or permanent establishment) as used in the preparation of the UPE’s consolidated financial statements (before consolidation adjustments to eliminate intra-group transactions).
Different adjustments may be made to get from commercial income to (Pillar Two) taxable income – examples include net tax expense, dividends and capital gains from certain subsidiaries, arm’s length adjustments, consolidation eliminations for entities in tax groups in the same jurisdiction, exclusions for income derived from shipping, etc. Although some of these look similar to what we’re used to, some may differ or apply under different conditions. Moreover, certain adjustments that are made for local tax purposes today, like the innovation box regime in the Netherlands, do not exist under the Pillar Two rules.
Deferred taxes are subject to certain adjustments under the Pillar Two rules – for example, deferred tax expenses are calculated at a maximum rate of 15%, and so-called recapture rules could take back the deferred tax -with some exceptions- if the deferred amount is not paid within five subsequent fiscal years.
If there is any top-up tax due, how and where will this be collected?
The key systematics of Pillar Two have been designed to include a main ‘top-down’ rule, the Income Inclusion Rule (‘IIR’), and a backstop rule, the Undertaxed Profit Rule (‘UTPR’). The IIR imposes a Top-Up Tax on the UPE with respect to low-taxed income (below 15%) of a foreign subsidiary or permanent establishment (comparable to a sort of CFC rule). The UTPR acts as a backstop rule to collect any top-up tax that is not collected under the IIR, and is effectuated through the denial of deductions (or other profit adjustments) applied by the (lower-tier) group entities in other jurisdictions that have implemented the UTPR (divided based on the number of employees and tangible asset value in the UTPR jurisdictions).
Next to the IIR and UTPR, the OECD and EU Pillar Two draft rules however also leave room for so-called Qualified Domestic Minimum Top-up Taxes (‘QDMTT’) which, if imposed, lower the top-up tax to be collected under the IIR and UTPR. As this QDMTT allows jurisdictions to collect the additional tax determined under Pillar Two rules themselves instead of potentially having other jurisdictions do so under the IIR or UTPR, it is expected that a lot of jurisdictions will introduce such a domestic tax, meaning that the collection of the top-up tax will, in that case, happen in the jurisdiction where the Pillar Two ETR is below 15%. Refer to the below visual for some simplified examples of how the IIR, UTPR and QDMTT could apply.
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Looking at these systematics, it is rather crucial that the rules are implemented consistently across jurisdictions, producing the same overall result to ensure that the MNE Group is subject to a minimum level of taxation in each jurisdiction without exposing it to the risk of double taxation. Although the OECD and EU drafts aim to facilitate such consistency, local implementations may still differ in terms of exact rules or interpretation/application thereof.
FAQs: the Dutch Pillar Two draft legislation
What is the current status of the implementation of the rules?
Following the publication of the draft rules and the closing of the public consultation round, the draft proposal will now be updated and then presented to the Dutch Parliament, where the legislation will be discussed in both Houses. The rules are then intended to be finalized and implemented during the course of 2023 to start applying for financial years starting on or after December 31, 2023 (and December 31, 2024 for the UTPR).
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What about the proposed EU Pillar Two Directive?
The Dutch draft legislation is meant to implement the proposed EU Pillar Two Directive (specifically the compromise text of June 16, 2022). Even though agreement at EU level has not yet been reached, the Dutch government still favors a common EU approach. The joint statement brought out together with France, Germany, Italy and Spain in September this year reconfirms the wish to reach agreement at EU level and therewith the commitment of the Netherlands to implement the Directive timely. The Dutch government indicated the draft legislation can form the basis for definitive proposed legislation, whereby EU developments are monitored closely.
How will the draft legislation be incorporated into the Dutch tax legislation?
To implement the rules in its domestic legislation, the Netherlands has chosen to create a separate tax act in addition to its current Corporate Income Tax Act (‘CITA’). The reason for having a new and separate act is primarily to avoid adding complexity to the current CITA.
Did the Netherlands opt for the QDMTT?
The Dutch draft legislation includes the optional QDMTT. The QDMTT aims to ensure that the Netherlands will be able to collect the Top-Up Tax of Dutch-based low-taxed entities (or permanent establishments) locally in the scenario the parent entity is not located in the Netherlands. If the Dutch domestic rules qualify as a QDMTT, a UPE located in another jurisdiction is, in principle, obliged to give a credit for the top-up tax collected under the Dutch QDMTT (we refer to the explanation above).
What is considered an MNE group?
An MNE group is a group of entities that are connected by ownership or control. The Pillar Two rules are linked to the group concept in the accounting standard rules as applied at UPE level when drawing up the consolidated annual accounts. The second form of an MNE group could be an entity with one or more permanent establishments – provided that the entity is not already part of an MNE group.
What if the company only has a presence in one jurisdiction?
In that case, the company can still qualify as a large-scale domestic group, which is in principle also in-scope of the Pillar Two rules.
What is considered to be a group entity?
The Dutch draft legislation identifies three types of group entities:
An entity that is part of an MNE group;
An entity that is part of a large-scale domestic group; and
A permanent establishment of an entity that is part of an MNE group.
Is a permanent establishment considered an entity?
A permanent establishment is treated as a separate group entity for purposes of the Dutch Pillar Two rules. This ensures that the income derived by the permanent establishment is not included in the calculation of the ETR in the jurisdiction of its Parent.
Must the entity have a legal personality?
An ‘entity’ is treated as such if it has legal personality and/or if it prepares financial statements, which is also the case for partnerships or trusts. It is, therefore, not necessarily required to have legal personality. Individuals do not fall under the definition of ‘entity’.
Are dividends (or other benefits) derived from subsidiaries included as income for the ETR calculation?
The rules deviate from the existing rules of the Dutch participation exemption in the CITA. Where the Dutch participation exemption generally excludes dividends and capital gains derived from qualifying subsidiaries in which ownership interests of 5% or more are held without a minimum holding period, the draft Dutch Pillar Two rules only allow for the exclusion of dividends and other income derived from a subsidiary if the ownership interest in that subsidiary is 10% or more and/or if the subsidiary has been held for at least a year. Based thereon, the taxable income under the Dutch CITA could look different from the income under the Dutch Pillar Two rules.
Another example of where the rules deviate is in relation to liquidation losses, which can under circumstances be taken into account when determining the taxable income under the Dutch CITA, while such losses are not taken into account under the Dutch Pillar Two rules.
Do the Pillar Two rules impact the application of the Dutch Innovation Box?
The innovation box effectively lowers the CIT rate from 25.8% to 9% for income derived from qualifying innovative activities. As a result, companies applying the innovation box may have a lower ETR in comparison to other companies. Although the Pillar Two rules will not impact the application of the Dutch innovation box as such, the effectiveness may be impacted by the Pillar Two rules if these would result in additional taxation up to the 15% minimum tax level. It is, however, expected that in most cases, the application of the Innovation Box will not result in an overall ETR of less than 15% (on a blended basis, seeing as the Dutch headline rate is 25.8% and generally only part of the revenue of a company is attributable to the innovation box). Therefore, it is not expected that this will impact many Dutch-based companies according to the explanatory statements to the Dutch draft Pillar Two legislation.
What will the compliance process of the new Pillar Two Act look like?
It is proposed that the in-scope Dutch-based UPE or group entity of an MNE should file a Pillar Two specific top-up tax information return separate from the actual top-up tax return. This top-up tax information return should contain the calculation of the top-up tax and the distribution thereof across the jurisdictions. Following the initial year in which the Pillar Two rules take effect in the Netherlands (likely 2024), a Netherlands-based UPE or MNE group entity has 18 months to file the top-up tax information return. Two months later, the consequent Pillar Two top-up tax return and payment term end, i.e. 20 months following the end of the initial year. In the second year (likely 2025), the information return should be filed within 15 months after the end of the second year, and the top-up tax return and payment term end 17 months following the end of the second year. As such, there is a bit more runway for taxpayers to allow for sufficient time to process the complex Pillar Two top-up tax information return calculations in a proper top-up tax return.
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The US Expansion Series is a podcast on how to successfully expand your business to the US market. This first season hosts Fleur & Flora of TABS will discuss the legal landscape, the risk of liabilities, pitching to US investors and the expansion journeys of Tony Chocolonely, ChannelEngine and the Belgian Boys. The goal of this podcast is to provide companies with the tools and guidance for those interested in expanding to the US market.
For this first episode Flora sat down with pitch coach David Beckett of Best3Minutes on how to create a winning pitch. Pitching is a very important part of a US expansion but not necessarily something that all European entrepreneurs are prepared for. In this episode David talks about the key elements of a great pitch, what US investors are looking for in a pitch and he explains the cultural differences between Europe and the US.
As a small country with a high-income economy, limited natural resources and little manufacturing, the Netherlands has adopted policies to facilitate the knowledge economy. The Dutch government is therefore looking for ways to highly incentivize R&D activities performed in the Netherlands by providing tax incentives to Dutch companies and individuals. This is done by 1) greatly reducing wage taxes on the R&D performed in the Netherlands (the cost-side) and 2) providing a special corporate income tax regime for any profit generated with R&D (the profit side). Both lead to a lower Effective Tax Rate, thus higher free cashflows, and as such a higher Company Value on a DCF basis (check out our explanation of the DCF method for valuating companies: NL/ENG).
In this long-read, we will provide you with the ins and outs of these Dutch tax regimes that incentivize R&D activities.
1. The cost side: the ‘WBSO’
The WBSO is an R&D remittance reduction intended to incentivize businesses to invest in research & development. This incentive greatly mitigates the cost-burden of R&D-companies by reducing the wage tax of employees conducting R&D activities. To obtain the benefits, an application needs to be filed with the Dutch Enterprise Agency (RVO) (in Dutch: Rijksdienst voor Ondernemend Nederland). The application boils down to: 1) proving that you are dealing with a project that contains a technical bottleneck, which 2) cannot be solved by any known techniques, and 3) requiring you to perform R&D work to find a solution.
1.1 The wage tax reduction
For wage tax withholding agents (i.e. employers), the WBSO entails a reduction in the wage tax to be paid for its employees conducting R&D activities. In 2022, this so-called ‘R&D remittance reduction’ is 32% of the R&D base up to € 350,000, and 16% thereafter. If you qualify as a ‘starter’ (i.e. you employ people for less than 5 years and were granted the WBSO-statement for <3 calendar years), you are eligible for an R&D remittance reduction of 40% over the first € 350,000.
R&D Base
Regular
Starter
€0 till €350,00
32%
40%
From €350.000
16%
16%
The R&D base – which functions as the basis for the wage remittance reduction – can be calculated in two ways:
Method 1: based on the number of R&D hours: this is the more straightforward regime, where the amount is calculated based on the number of hours granted, with an average hourly wage of € 29 plus an additional amount of € 10 per R&D-hour (up till 1,800 R&D hours) and € 4 for any additional hours on top of the 1,800 hours.
Method 2: based on the actual costs and expenses that relate to the R&D activities.
In case you would like to calculate the potential WBSO-benefit yourself, feel free to use our open-source Excel-file. You can download the Excel file here:
1.2 The number of R&D hours: choose a reasonable number!
A WBSO-statement always applies to any future R&D work performed by the company. As a result, you will need to make a forecast of the number of R&D hours you are planning on spending (method 1).
Make sure to apply for a reasonable number of R&D hours. The reason is that the RVO 1) checks whether the number of R&D hours requested isproportionate to the project and the amount of FTE involved, and 2) the RVO regularly audits companies on their number of R&D hours spent. In case the number of R&D hours for which you applied cannot be justified, you risk a correction and a fine.
1.3 ‘But…our R&D project is not that innovative.’
While analyzing the R&D activities of a potential WBSO-applicant, we sometimes notice that the company itself does not consider the project to be ‘innovative’. In most cases this is caused by 1) R&D employees perceiving the R&D work as ‘simple’ due to them being experts in their respective field, or 2) comparing the R&D activities/ the unfinished product to the (finalized) product of a competitor. Though we understand that this might seem problematic when filing a WBSO-application, we would like to stress that both these factors are completely irrelevant for WBSO-purposes. The only relevant factor when determining if a project qualifies for WBSO-purposes is whether you aim to solve a technical bottleneck that cannot be solved by any known methods. It is therefore irrelevant if this work is perceived as simple by the R&D employees or whether a competitor has already solved this bottleneck. For instance: the RVO will not reject a WBSO-application in case you are planning on solving a technical bottleneck for a new ‘Google-like’ search engine, just because Google itself might have a way of solving the technical bottleneck. What isn’t considered R&D work – and will not qualify for WBSO-purposes – is using existing technologies to solve technical bottlenecks. For example: creating a machine learning model by utilizing certain libraries (such as Tensorflow) will not qualify as R&D work, but developing a machine learning model from scratch (and solving a technical bottleneck in the process) will.
2. The profit side: the innovation box
The Dutch innovation box is a special corporate income tax regime for companies who generate profit via a self-developed intangible asset. Any profits that fall under the scope of the innovation box are effectively taxed at a corporate income tax rate of ~9% instead of the statutory rates of up to 25.8%.
2.1 The requirements: the WBSO and a patent/plant breeders’ right (in Dutch: Kwekersrecht).
The Dutch corporate income tax act differentiates between so-called small-sized companies and larger-sized companies. The requirements a company needs to meet in order to apply for the Dutch innovation box vary depending on its size. For the small-sized companies, the application can be filed as soon as a WBSO-statement is issued by the Dutch Enterprise Agency. Larger-sized-companies require a patent or a so-called plant breeders’ right (in Dutch: Kwekersrecht).
A company qualifies as a ‘small-sized company’ if:
The total gross margin of the company that relates to the intangible asset is ≤ € 37.5 million in the last 5 years (i.e. the sum of the last 5 years).
The total turnover of the company is ≤ € 250 million in the last 5 years (i.e. the sum of the last 5 years).
2.2 Four methods to determine the profit subject to the innovation box
The innovation box benefit can be calculated via four methods:
The peel-off method (‘afpelmethode’).
The cost-plus method.
The single- intangible asset method (‘per activum’).
The flat rate method.
Which method is best suited for your business depends on your business model as well as the role R&D fulfills within your company. In practice, a functional analysis of your company will determine which method is most suited and which percentage of the profit is subject to the innovation box scheme. For completeness’ sake, we would like to note that it is a common misunderstanding that 100% of a company’s profits can attributed to the innovation box. Even the most high-tech companies in which R&D is interwoven in their entire business process cannot allocate all of their profits to the innovation box scheme. The tax authorities will – in such a case – always consider a part of the profits to be allocable to an entrepreneurship-like function within a company.
2.2.1 The peel-off method (in Dutch: ‘afpelmethode’).
In case R&D is a core activity within your company and the profits that relate to an intangible asset cannot be determined on a stand-alone basis, the peel-off method is the most suited method. The peel-off method is – in most cases – the most beneficial way of determining the innovation box profit, as the entire EBIT (‘Earnings before interest and tax’) of the company will be considered the starting point. This method works by allocating a small part of the profits to the more routine-like functions within the company. The remainder of the profits is then allocated to the core divisions/functions within the company. In a way: you are ‘peeling off’ the company’s functions layer by layer.
An example of the peel-off method allocation per core-division would be:
Entrepreneurship
20%
Sales
10%
Production
30% +
Total:
60%
Attributable to R&D
40% +
Total:
100%
In the above example, 40% of the company’s profits are allocable to innovation, and will therefore be taxed against an effective corporate income tax rate of ~9%.
2.2.2 When is R&D considered to be a core activity?
Well, that depends on the activities of the company. The Dutch tax authorities will take the position that the peel-off method is the most suited method if the R&D-activities are an essential part of the day-to-day operations. This is the case if R&D activities are interwoven in all of the company’s operations and the R&D function is one of the most important functions in terms of value creation for the company.
2.2.3 How do we determine the percentages attributable to each division/activity when applying the peel-off method?
When applying the peel-off method, a functional analysis determines which part of the profits is allocable to each division/function. The exact percentage per division depends on the size of the company (smaller or larger size), the industry and the function R&D fulfills within the company. Factors that may be relevant in this analysis are:
The number of WBSO-hours.
The intertwinement of R&D within the different business units of the company.
The different types of products/service lines within the company.
2.2.4 The hurdle – development costs
It is important to note that the innovation box regime contains a hurdle for the development costs that relate to the development of the intangible asset. In short: the innovation box regime will only be applicable if the development costs for the intangible are compensated by the profits generated by said intangible. The goal here is to prevent a deduction of development costs against the standard corporate income tax rate of 25,8% (maximum), while the profits are taxed against an effective tax rate of ~9%.
2.3 The cost-plus method
In case innovation is not considered a core-activity within the company but rather complementary to the company’s core activity, the Dutch tax authorities may take the position that the innovation box profits should be determined on a cost-plus basis.
The cost-plus method entails adding a mark-up on all costs (direct & indirect) relating to the R&D work. This mark-up is determined by benchmarking the remuneration an independent third party would receive for these R&D activities.
Under normal circumstances, a mark-up between 8% – 15% is accepted by the Dutch tax authorities.
2.4 The single intangible asset method
The single intangible asset method is very similar to the peel-off method. When applying the single intangible asset method, the operational profit needs to be divided between routine functions and core activities/divisions of the company. The difference here is that – while the peel-off method considers the EBIT (‘earnings before interest and tax’) as the starting point – the single intangible asset method only takes the development costs and the ‘benefits’ that directly relate to the intangible asset into account. The single intangible asset method is generally used to calculate the innovation box profits in royalty structures, where there is a direct and easily identifiable revenue stream that relates to the intangible asset.
Note that – same as for the peel-off method – a hurdle based on the development costs applies.
2.5 The flat rate method
In the event that the earlier described methods are deemed to be too complex, there is always the possibility of utilizing the flat rate method. Based on this method, 25% of the profit will fall under the scope of the Dutch innovation box. The benefit is however capped to € 25,000 on a yearly basis, making this – in most cases – only a viable option for a small/ start-up company.
2.6. The corporate income tax benefits
Although it may seem a bit nitty gritty, it is important to note that the innovation box benefit is actually a tax base exemption -rather than a tax rate reduction- calculated via the following formula: (16/25.8) x innovation box profits (2022). This exemption results in an effective tax rate of ~9% for any profits that are subject to the innovation box scheme. It also results in an additional – and in most cases unforeseen – benefit that the innovation box scheme ‘extends’ the first corporate income tax bracket.
2.6.1 Extending the first corporate income tax bracket and further reducing the effective tax rate
Besides the fact that the innovation box reduces the effective tax rate of profits that fall within its scope, the innovation box also positively influences the remainder of the profits. This is a result of the fact that the remainder of the profits (i.e. part of the profits that are not subject to the innovation box) are taxed against the regular, below-mentioned corporate income tax rates.
Taxable profit (2022)
Tax rate
€ 0 till € 395,000
15%
From € 395,000
25.8%
Consequently, the remaining profits will first be taxed in the first bracket at a tax rate of 15% up to € 395.000, thus further reducing the effective tax rate. In case you are wondering how this would affect the effective tax rate of your organization, feel free to use our Excel-file which shows you the effective tax rate depending on the taxable profit and the innovation box percentage. Note that we based this Excel file on the peel-off method. You can download our Excel file here:
The innovation box ruling process starts with a ruling application request. Once filed, the Dutch tax authorities will send over a standardized letter containing several questions to get to know the applicant. These questions relate to: 1) the line of business in which the company operates, 2) the intangible asset/ intellectual property developed by the company and 3) the preferred method to determine the innovation box profit. In most cases, the Dutch tax authorities will request a company specific questionnaire following the initial application. Once the Dutch tax authorities have a clear initial image of the company’s business, they will plan a meeting at the company’s HQ. This meeting is meant to help the Dutch tax authorities understand how the business operates and what role R&D fulfills within the company. After the meeting, the Dutch tax authorities and the company will conclude a tax ruling . The ruling will contain:
a description of the company;
a description of the R&D activities;
the method to determine the innovation box profit.
To further specify which part of the profits will be subject to the innovation box scheme, an addendum to the ruling request will be concluded, based on the company’s commercial forecasts. The ruling will be concluded for a period of 5 years.
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4. FAQ
4.1 Can I outsource some of the R&D that contributes to my intangible asset?
You are able to outsource some of the R&D work as long as the costs that relate to the R&D work (as well as any potential risks) are borne by the innovation box applicant.
4.2 Does this mean that I can outsource the R&D work to an affiliated entity?
Outsourcing to an affiliated entity is possible, but may impact the total innovation box benefit. The Dutch corporate income tax act contains a limitation on the innovation box benefits that relate to the outsourcing of R&D work to an affiliated entity. The reason is that – in most cases – affiliated entities are able to structure their R&D activities between different jurisdictions. To mitigate any unwanted tax structuring which might arise in such a case, the innovation box benefits will be limited based on the following formula:
Qualifying innovation box benefits =
Qualifying expenses X 1,3
________________________
Total expenses
X benefits
In the above formula, the outsourced R&D expenses to an affiliated entity are not considered ‘qualifying expenses’. As a result, a maximum of 30% of the expenses can be outsourced to an affiliated entity without it impacting the innovation box benefits.
4.3 An Innovation box ruling is concluded for a period of 5 years, what if my corporate structure/ my business model unexpectedly changes during this time?
Every tax ruling contains a clause stating that the ruling remains valid as long as the relevant facts and circumstances do not change. In such a case, you are obligated to notify the Dutch tax authorities accordingly. This may result in the termination of the current ruling.
4.4 I filed a WBSO-request for 2.000 R&D hours. In reality, my company conducted > 2000 R&D hours. Can I file a new WBSO-application to retroactively receive a wage remittance reduction for these additional R&D hours?
Unfortunately, it is not possible to file a WBSO-application to retroactively receive a wage remittance reduction for any additional R&D hours. As a WBSO-application does need to be filed on a yearly basis however, you are therefore able to file a new request next year. For completeness’ sake, we note that you are obligated to notify the Dutch Enterprise Agency in case you spend less than the requested number of R&D hours. As a result, the wage remittance reduction will be reduced accordingly.
4.5 So, the Dutch tax authorities agree to allocate 15% of my EBIT to the Dutch innovation box. Does this mean I can allocate 15% of my EBIT right of the bat?
While concluding an innovation box ruling, the Dutch tax authorities may consider an start-up phase to be present. The duration depends on the innovation type as well as the business structure. As soon as this period ends, you are able to allocate the full amount – 15% of the EBIT – to the Dutch innovation box. For example: in case you conclude a start-up phase of 3 years and an R%D percentage 15%, you will receive an innovation box allocation of 5% in the first year of the ruling, 10% in the second year and finally 15% in the third year.
5. Combine the WBSO and innovation box for an enhanced investment case and company value
Where R&D-cycles generally see any revenues being proceeded by a cost-burning phase, a cost-side tax benefit can logically make an R&D project more feasible, as it (1) reduces the burn rate and (2) lengthens the runway. The WBSO does exactly that and therefore provides great value in the ‘pre Break Even Point’ phase.
Investors investing in ‘post-BEP phase’ companies are generally enticed into the high-risk financing of an R&D cycle by the calculation of (1) the chance of success * (2) the rate of return. As the investor rate of return is influenced heavily by profit tax functions, the innovation box can make an R&D project in the post-BEP phase more feasible as well since it increases the outlook of factor (2).
By combing both the WBSO and subsequently the innovation box, a more attractive investment case can thus be achieved.
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Interested in applying the WBSO and/or innovation box to your company? Book a timeslot with us below, it’s on the house!
Chief Quality Officer and member of the Executive Board, Deloitte Netherlands
Women on Supervisory Boards: Why is this issue important? Who is affected?
Liesbeth
In the Netherlands, supervisory boards have traditionally shown the same picture: white men in grey suits. Luckily this picture has been changing over the past five years. As the role of the supervisory board became more relevant and gained in-depth, awareness rose that the presence of diverse viewpoints within them is important in order to avoid “groupthink” and tunnel vision. Yet the tendency was still to appoint new supervisory board members from the “old boys network.” Forcing a breakthrough legislation was necessary. In the Netherlands, we now have so-called quota legislation, in which it is ruled that 1/3 of the supervisory boards will have to be comprised of women. As long as this quotum has not been reached, appointments of new male supervisory board members are invalid. The impact of this legislation on the supervisory boards is already being felt. A lot of listed companies now have at least 1/3 of women on their supervisory boards. The next important step will be that management boards also have the necessary diversity.
Thaima
The issue of the representation of women in all facets of life goes to the heart of democratic values and governance. In my role as President of the European Network for Women in Leadership, I see the subject of the feminization of leadership and management under discussion all over Europe. Studies have shown that companies with higher levels of gender diversity outperform those with male-dominated management, and the larger goal—beyond women on supervisory boards—is for more women in executive roles generally.
Following Norway’s lead in 2006, eight EU countries have adopted mandatory gender quotas for listed companies, including France, Belgium, Italy and the Netherlands, with ten others having taken a more incentive-driven approach. In their search for female talent, male leadership is discovering that this talent exists! The visibility of successful women and a constellation of heterogenous role models contributes to the development of a pipeline of female talent and future female leaders.
This trend, however, is not irreversible, and we need to remain vigilant, especially in times of social and economic upheaval. Some companies appoint women to their boards to comply with the law but make sure that they have no real power or influence. Having the same few women sit on several supervisory boards rather than looking for other talent is also not uncommon.
What have you seen on the ground?
Liesbeth
The NSE supervisory board has oversight over the NSE executive board. NSE is Deloitte’s European organization and consists of 28 geographies.
On our board, we have over 50% female representatives, all with different cultural backgrounds. We also have three independent non-executives on our supervisory board, which assures the objectivity of this board. We strive for a certain percentage of women and different cultures on this board and have open conversations about how to reach the targets. We have a strong focus on people and on the long term, and we keep in mind the impact our decisions will have on our legacy. We believe strongly that our diverse board provides the diversity of thought necessary for discussions and decisions of value, for both the short and long term.
My main takeaway is that inclusivity and diversity are a “must” for boards; we have to take firm steps and be open about dilemmas and our values. Whatever form of diversity we strive for, cultural diversity, gender diversity, ultimately, it is about diversity of thought. And we in our NSE board see the benefits of having diversity of thought: in decision making and in having meaningful discussions.
Thaima
The Deloitte example is a great one and a best practice to communicate broadly.
I am currently a board member of Focus Interactive, a gaming company. The company clearly wants to work with their supervisory board members on business strategy. The other board members coming from the same world, my female colleague and I bring fresh air and new perspectives, she with a financial background, and I with my law and public affairs perspectives—gained from ten years at Microsoft as Legal and Corporate Affairs General Counsel, and subsequent work with a Law and Corporate Affairs firm.
My takeaways:
Don’t be shy, and forget the impostor syndrome: the knowledge and experience that makes you different from the other members might very well be the reason you were chosen. If the company leadership is not interested by your ideas or recommendations, they will simply not act on them—don’t take it personally.
You are there to make/approve decisions engaging the company. Being assertive goes down well, provided you have a constructive approach. Feel free to ask questions and speak up, remind others of the rules and check compliance execution. You are protecting the company by doing so.
What’s coming next?
Liesbeth
An important next step is moving from diversity to inclusion. The good news is that there will be more women on boards as a result of quota legislation. However, if the culture does not change and women do not feel safe enough to ask questions and express differing views, there is no inclusion and no benefit from having diverse points-of-view. The Chair of the supervisory board must create an atmosphere in which everybody can be open to ask questions and express views. At this moment, diversity is too often seen as just a check-the-box exercise. If boards look different but still act the same, there has been no real progress—the company will not benefit from diversity of thought. More action is needed to go from diversity to inclusion.
Global progress on gender equality is encouraging, but overall, progress is slow. It has therefore become even more important to take concrete action, appointing more women not only to supervisory boards but also to boards of directors. We should also challenge if 1/3 of women on boards is sufficient because then it still doesn’t give a balance in boards since you have a predominance of men, which obviously has its effect on discussions, decisions and also on inclusion.
Thaima
Companies now have a diversity of profiles in their workforce, and management and leadership teams are more resilient and more successful as a result. The coming together of different skills and ideas helps align companies in the diverse societies they operate in and better understand their markets and customers. These types of factors, while well understood, are not always taken into account at the right level of management, and old reflexes and stereotypes are still alive and kicking.
Women are now equally, if not more, educated than men. Aside from the topic of women on supervisory boards, tackling the broader issue of women in leadership positions also addresses corporate governance and the need to recruit and retain female talent.
There is not one legal tradition in Europe but several. This results in huge differences between countries according to their cultures, histories and legal traditions. I believe it is necessary for the European Union to continue taking initiatives to align the policies of member states, levelling them up to the standards in the more advanced countries. The recent deal on the Directive on Women on Boards, which had been blocked for ten years, should make a big difference and will complement EU efforts to mainstream gender into wider policy-making processes, including, most recently, by making it a criterion for receiving EU Covid recovery funding.
On Thursday the 20th of January 2022 the Organisation for Economic Co-operation and Development (also known as: ‘OECD’) released an update to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. This update mainly incorporates earlier released documents, but it also makes some consistency changes to the OECD Transfer Pricing Guidelines of 2017. These consistency changes were needed to produce the consolidated version of the Transfer Pricing Guidelines and were approved by the OECD/G20 Inclusive Framework on BEPS on the 7th of January 2022.
The following documents are incorporated in the Transfer Pricing Guidelines 2022:
Revised Guidance on the Application of the Transactional Profit Split Method
The guidance set out in this report responds to the mandate under Action 10 of the BEPS Action Plan, which requires the development of:
“rules to prevent BEPS by engaging in transactions which would not, or would only very rarely, occur between third parties. This will involve adopting transfer pricing rules or special measures to: … (ii) clarify the application of transfer pricing methods, in particular profit splits, in the context of global value chains”
Since 2010, the Transfer Pricing Guidelines states that the most appropriate method should always be used. This method can be (among others) the profit split method. This revised guidance provides clarification and significantly expands the guidance on when a profit split method may be the most appropriate method. It describes certain indicators such as the unique and valuable contributions each party makes to the transaction and the share of economically significant risk. Furthermore, the revised guidance includes several examples illustrating the principles discussed.
Guidance for Tax Administrations on the Application of the Approach to Hard-to-Value Intangibles
BEPS Action 8 addresses transfer pricing issues to controlled transactions involving intangibles, since intangibles are by definition mobile and they are often hard-to-value which makes base erosion and profit shifting possible. The OECD states that misallocation of these profits has heavily contributed to base erosion and profit shifting.
The hard-to-value intangibles approach disarms the negative effects of information asymmetry, by ensuring that tax administrations can consider ex post outcomes as presumptive evidence about the appropriateness of the ex-ante pricing arrangements. I.e. administrations can take later outcomes in consideration of the earlier dealt with pricing agreement. At the same time, taxpayers have the possibility to rebut such presumptive evidence by demonstrating the reliability of the information supporting the pricing methodology adopted at the time of the controlled transaction took place. This is to prevent later information to rule over the earlier information, which would certainly subvert the legal security of the taxpayer.
The guidance aims at reaching a common understanding and practice among tax administrations on how to apply adjustments resulting from the application of the hard-to-value intangibles approach. The guidance should improve consistency and reduce the risk of economic double taxation.
Transfer Pricing Guidance on Financial Transactions
The 2020 report on financial transactions pertains to Action 4 and provides guidance in the accurate delineation of financial transactions, particularly in capital structures of multinational enterprises. Furthermore, it analyses the pricing of a controlled financial transaction. The report describes the transfer pricing aspects of financial transactions such as intra-group loans, treasury functions, cash pooling, hedging, guarantees and captive insurance.
Action 4 constitutes the limitations on interest deductions, and aims to limit base erosion through the use of interest expenses to achieve interest deduction or to finance the production of exempt or deferred income.
