We previously reported on the agreement that the EU Council of Economics and Finance Ministers (ECOFIN) reached on December 9, 2014 regarding the amendment of the Parent‑Subsidiary Directive and the Directive covering the automatic exchange of information. Although no public consultation took place on the subject, more is now known about the future of the European patent box regimes. Below, we will discuss international developments in this area, as well as the possible consequences for the Netherlands.

Background and OECD

Several countries, including some Member States of the European Union (EU), employ tax instruments to promote innovation, such as offering the possibility of taxing profits derived from intangible assets at an advantageous rate. These innovation and patent boxes (in the Netherlands: the innovation box) are the topic of discussion in various contexts: within the OECD through the Forum on Harmful Tax Practices (FHTP), at the EU level through the EU Code of Conduct Group (Code of Conduct for business taxation) and by the European Commission in connection with possible state aid. The regimes are, on the one hand, important for the stimulation of research and development, but may, on the other hand, have an adverse effect on competition.

To overcome the presumed disadvantages of the regimes and to develop and implement a substance‑oriented approach, the OECD expressed a preference for a ‘substantial activity requirement’ in its report on BEPS Action 5 (Countering Harmful Tax Practices More Effectively), which was published on September 16, 2014. This requirement is based on a nexus approach, which allows jurisdictions to allocate benefits to income from intellectual property (IP) as long as there is a direct nexus (connection) between the income subject to tax relief and the expenses that contribute to that income. These expenses are in fact the means of assessing whether there is substantial activity. The only expenses that qualify are those that arise from research & development (R&D) actually performed by the taxpayer itself. Expenses incurred for activities performed by affiliated parties (outsourcing) and acquired intellectual property therefore do not, in principle, qualify.

The above can be summarized in the following formula:


Qualifying expenses incurred for the development of an IP asset


Total expenses incurred for the development of an IP asset




x    total income generated by an IP asset



= attributable IP income under the IP regime

It is also important that the definition of ‘IP asset’ in the approach described above only includes patents and IP assets that are functionally equivalent to patents, if they are both protected by law and subject to similar approval and registration procedures. This would mean that ‘non-patentable’ innovations do not qualify.

German-British proposal

In mid-November 2014 Germany and the United Kingdom made ​​a joint proposal to relax the abovementioned OECD nexus approach. The proposal was to increase the qualifying expenses – the numerator in the fraction included above – by expenses for acquired IP and expenses in respect of R&D outsourced to affiliated parties, subject to a maximum of 30% of the qualifying expenses. A larger part of the IP income is consequently included under the IP regime. Agreement was subsequently reached in the FHTP on this adaptation, also referred to as the ‘modified nexus approach’. Incidentally, the agreement will still have to be submitted in 2015 to the Council of Ministers of the OECD and ultimately to the G20.

EU: Code of Conduct Group and ECOFIN agreement

In December 2013, the ECOFIN asked the EU Code of Conduct Group to assess all patent box regimes in the EU, with account being taken of the OECD developments. The EU Code of Conduct Group has recently reported to the ECOFIN that it endorses the modified nexus approach as discussed in the FHTP, and that the EU patent box regimes are not compatible with it and therefore need to be adjusted. The Netherlands is the only Member State to have made ​​a reservation (see below). On December 9, 2014, the ECOFIN adopted the conclusions of the Code of Conduct Group.

Transitional rules

Of vital importance is that under the present proposal use may be made of the existing innovation and patent box regimes until June 30, 2021 at the latest. From July 1, 2021 all innovation and patent box regimes must therefore adopt the new features. Existing regimes may also remain open to new entrants until June 30, 2016. In this connection, consideration will still be given to combating abuse. Transitional rules, similar to those discussed here, also form part of the German-British proposal.

Next steps


The legislative process required to implement the changes to the European patent box regimes will commence in 2015. In addition, consideration will be given to tracking and tracing development costs (whether they qualify or not) and to a transitional arrangement in order to transfer the IP from the existing regimes to new regimes. The EU Code of Conduct Group will report on this no later than in June 2015.


In the coming months, the details of the modified nexus approach, including tracking and tracing, will be the subject of further discussion in the FHTP. It is expected that the final report on BEPS Action 5 will be published in September 2015.

The Netherlands: possible consequences and efforts

As already mentioned, the Netherlands is the only Member State to have made ​​a reservation on the report of the EU Code of Conduct Group. From the report of the ECOFIN meeting presented to the Lower House by the Deputy Minister of Finance on December 12, 2014 it appears that this caveat concerns the scope of the definition of an IP asset, which determines the profits that can be attributed to an innovation or patent box. In the report, the Deputy Minister states that for the competitiveness of small and medium-sized enterprises in particular it is important that innovation boxes are not confined to patents, but also that profits arising from activities for which an R&D certificate has been issued (R&D innovations) remain within the innovation box. After all, the process of applying for a patent is often too expensive for SMEs, while they do have more than sufficient ties with the Member State of residence. In this regard, the Netherlands has added a written statement to the minutes of the ECOFIN meeting. In his letter to the Lower House of December 4, 2014, the Deputy Minister had already stated that the Netherlands would also continue to argue strongly within the EU and OECD for the inclusion of R&D innovations in the future innovation box. At the moment, however, it is still uncertain whether it will succeed in this.

If you would like more information on this topic, our tax advisors will naturally be happy to be of assistance.

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