This is contribution number three by KPMG Meijburg & Co regarding the special Dutch tax incentives for research and development activities.

This article is most likely to be relevant for investments by multinationals in high-technology equipment, pharmaceutical products, etc.

On April 26, 1994, the Dutch Parliament approved a Bill regarding the facilitation of research and development activities (hereafter R&D). The Bill entered into force retroactively as of January 1, 1994. In addition it has been confirmed that the bill has been approved by the Commission of the European Union.
Below we shall give you a survey of the contents of the bill.

Which Entrepreneurs Are Eligible For The Facility?
The investors intended to benefit from the facility consists of:
-Wage tax withholding agents who perform R&D activities.
A condition is that the withholding agent carries on an enterprise as defined by the 1964 Income Tax Act (hereafter 1964 ITA) or the 1969 Corporate Income Tax Act (hereafter 1969 CITA), or carries out R&D activities by virtue of a written agreement with and for the account of an other enterprise (so-called contract research).

If the withholding agent is part of a fiscal unity in the sense of the 1969 CITA and makes employees available for the performance of R&D activities of an enterprise within this fiscal unity, upon request and under further conditions the withholding agent will be deemed to perform the R&D activities himself. Without such a request there would be no entitlement to the facility, neither for the borrowing nor for the lending company.

-Individuals who carry on an enterprise as defined by the 1964 ITA and perform R&D themselves.

What Does The Facility Imply?
The bill provides for a reduction of the wage tax payable and thus of the employer's gross salary expense. The amount of the reduction is related to the overall salary expense of the employees who carry out R&D activities.

What Are R&D Activities?
The bill defines the term R&D activities as "systematically organised activities in the Netherlands directly and solely aimed at technical and scientific research or the development of new technical (elements of) physical products or production processes, as well as a preceding systematically organised feasibility study". The Ministry of Economic Affairs has published a draft regulation which indicates what activities in any case do not fall within the term R&D activities. A copy of an unofficial translation of (a summary of) this regulation can be provided upon request.

The R&D Declaration
A condition for the applicability of the facility is that the withholding agent should apply for a so-called R&D declaration from the Ministry of Economic Affairs. The application for the R&D declaration should at least mention the kind of activities concerned and the amount of overall salary expense expected to be involved.

Within 4 months after the end of the calendar year the withholding agent should provide the wage tax inspector with a definitive statement of the R&D wages actually paid, while submitting an auditor's report or a statement from an accounting consultant. If the R&D wages actually paid are less than the wages mentioned in the R&D declaration, the reduction enjoyed in excess should be paid on return within 4 months after the end of the calendar year. If the difference exceeds 20%, the inspector may also impose a fine. This fine may be increased if the underpayment was intentionally or caused by gross negligence. These fines are not deductible for income tax and corporate income tax purposes.

If the R&D wages actually paid turns out to exceed amount of the wage mentioned in the R&D declaration, the inspector will refund the excessive wage tax paid.

April 1994, KPMG Meijburg & Co

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Further information can be obtained from Mr Alfred GM Groenen, MCL, KPMG Meijburg & Co, Amsterdam (Netherlands); fax 31 (20) 656 1247