Agreement on the requirements of favourable IP regimes
Many countries have implemented favourable tax regimes providing for tax incentives for intellectual property. The Netherlands has for instance the ‘innovation box’ regime. In the Base Erosion and Profit Shifting project (action 5), the OECD has initially announced to investigate all these regimes to determine whether these regimes could be qualified as harmful tax competition between countries.
New approach for IP tax incentives
In the following discussion the UK and the German government provided a solution for the future, which is called the “modified nexus approach”. In essence it means that tax incentives are only provided to tax payers if they actually also conduct R&D activities in the same country.
Very roughly the special IP regime in this new approach can only be applied to the income resulting from the following equation:
(Local qualifying R&D expenses / Group qualifying R&D expenses) * income from “qualifying IP assets”
If a local company outsources or buys IP from affiliated entities it will not qualify as local R&D expense.
The leaders of the G20 and OECD countries also agreed:
- that the old IP regimes should be closed to new entrants before 30 June 2016.
- Final abolition of old IP regimes should not be later than 30 June 2021
- Since it is anticipated that the future changes of the new IP tax incentive requirements may result in additional business restructuring expenses, countries may apply an uplift of 30% to the ‘local qualifying R&D expenses’. As a result a larger share of the result still may benefit from the IP tax incentive.
Very important is to determine the definition of “qualifying IP assets”. Initially, countries like the UK and Germany were in favour of the requirement that IP should be patented. This would be very unfavourable for small businesses and the Dutch government is against this approach. At this stage no final agreement has been reached on “qualifying IP assets”. Next to this question many practical issues need to be resolved and explained.
Companies that have set up contract R&D structures or transferred the IP to countries where no significant R&D activities take place, may need to anticipate changes to the existing structure. This restructuring may subsequently result in close review of local tax authorities. We recommend to conduct a provisional impact review.back to overview