In this article we discuss position paper KG:040:2022:4 of June 17, 2022. In this position paper the Knowledge Group on international taxation, corporate income tax & the taxation of profits answers the question whether based on the matching principle for the calculation of the second limit, production costs of intangible assets, which pursuant to Article 8, Paragraph 1 of the Dutch Corporate Income Tax (DCIT) Act in conjunction with Article 3.30, Paragraph 3 of the Dutch Individual Income Tax (DIIT) Act, have been fully amortized in the calendar year of production, must be allocated to years other than the calendar year of production.
in accordance with Article 8, Paragraph 1 of the DCIT Act in conjunction with Article 3.30, Paragraph 3 of the DIIT Act, a body that is subject to tax in the Netherlands has amortized the full production costs of intangible assets at once. In later years, the intangible assets start to pay off, resulting in the receipt of royalties from abroad over which foreign withholding taxes have been withheld.
Should the costs that have been amortized in previous years be taken into account when calculating the second limit for the crediting of the foreign withholding tax?
No, costs deducted in a previous year cannot be included in the second limit of a later year. When calculating the second limit, each year stands alone.
This answer applies to the crediting of foreign withholding tax of both regular royalties as well as royalties to which the innovation box applies.
From the consideration of the tax authorities
The Netherlands fully includes foreign profit components in the taxable amount. Subsequently, the corporate income tax payable for the relevant year is reduced by the tax paid abroad (first limit) or, if that amount is lower, by the corporate income tax due over the net foreign profit components (second limit).
The purpose of the limits is that the Netherlands does not credit more foreign tax than is actually levied abroad (first limit), but also not more than the amount that is owed in Dutch corporate income tax over the net foreign profit components (second limit).
The net foreign profit components are determined. This means that the costs incurred in relation to the foreign income are first deducted from the gross foreign income before the Dutch corporation tax owed is calculated.
Article 36, Paragraph 4 of the Besluit voorkoming dubbele belasting 2001 (Decree on the Avoidance Double Taxation Decree 2001 (hereafter: the 2001 Decree)) regarding regular dividends, interest and royalties reads as follows:
“(…) dividends, royalties and interest are reduced by the costs incurred in relation therewith.”
For innovation box royalties, the net method in Art. 36a, Paragraph 3 of the 2001 Decree is defined in the same way:
“(…) royalties are reduced by the costs incurred in relation therewith.”.
Both in the case of regular royalties and innovation box royalties, it concerns “all” costs incurred in relation therewith.
A follow-up question is whether all costs incurred in relation therewith also include the costs of previous or later years? Is matching across a year end possible if costs and income arise in different years? Matching across a year end could be relevant if sound business principles require capitalization and amortization of the costs incurred. This may be the case with production costs of an intangible asset. In this respect Article 3.30, Paragraph 3 of the DIIT Act sets the sound business principles aside. This provision reads:
“The production costs of intangible assets can be amortized at once in the calendar year of production”.
In this context, see also the judgment of the Dutch Supreme Court in the Brazilian currency loss (June 17, 2011, ECLI:NL:HR:2011:BP1473), which excludes changes of the source from the second limit. Here too, the Dutch Supreme Court points out that only costs of the year itself can be taken into account.
The full Dutch text of the position paper can be found here.
Other position papers of the Knowledge Group on international taxation, corporate income tax & the taxation of profits of which we already made an English summary can be found here.
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