Curaçao: New rules on R&D-declaration should open up possibility to apply the innovation box for profit tax purposes
February 9, 2022
Spoiler: if an R&D-declaration is obtained and the innovation box can be applied, income allocable to the innovation box is taxed at 0% profit tax.
The innovation box regime was introduced for Curaçao profit tax purposes in 2018. This regime allows for a tax incentive when profits are generated with qualifying intangible assets. To apply the innovation box regime, the intangible assets should result from R&D-activities for which an R&D-declaration (‘speur- en ontwikkelingsonderzoek verklaring’) was obtained from the competent authority. To date, R&D-declarations have not been issued yet, because it was unclear for which activities such declaration could be issued. The Minister of Finance now issued additional rules on February 4, 2022, which should allow the competent authority to issue R&D-declarations shortly. Subsequently, the taxpayer can apply the innovation box if conditions are met.
In this Tax Instant News, we discuss for which R&D-activities an R&D-declaration can be obtained. Additionally, the most important conditions to apply the innovation box regime and relevant considerations in relation thereto are discussed. Also, a practical checklist for conducting a high-level internal review if the innovation box may be relevant for your company can be found here.
An R&D-declaration is a statement by the competent authority that certain activities qualify as ‘research and development activities’ (‘speur- en ontwikkelingswerk’) aimed at technical-scientific research or the development of a technical new (component of a) tangible asset, manufacturing process or software. The declaration will include a description of the qualifying R&D-work, the period when the activities were conducted and whether the R&D-activities were outsourced or not.
- Upon request – An R&D-declaration can be obtained upon request. The request needs to be submitted in writing with the competent authority, in this case, the Director of the Bureau of Telecommunication & Post (“BTP”).
- Timing – The R&D-declaration should be requested within 3 months after an R&D project is completed. The rules allow that an R&D-declaration can also be obtained for projects that have been completed between July 1, 2018 and February 4, 2022, if a request is submitted before August 6 , 2022.
It is unclear how to deal with continuing R&D activities. It could be considered to divide a large R&D project in multiple annual R&D projects and request an R&D-declaration annually.
- Relevant information and documentation – Amongst others, the request should include: the R&D-activities conducted by the taxpayer itself, information on any outsourced R&D-activities, the country where the activities took place and the period during which the activities took place.
Large companies (defined below) are obligated to provide proof that the intangible asset is legally protected (e.g. a patent, registered trademark or similar legal protection). In case of software, this should be a statement from a Curaçao attorney-at-law confirming:
1° that, and by whom, and in what way the software has been made public;
2° the extent to which the source or object code bears the original character of the maker; and
3° the notarial deed in which the source or object code has been recorded and registered with the Inspector in accordance with the Registration Ordinance 1908, or deposited with the Intellectual Property Office in an i-Envelope.
Upon request, small companies are not obligated to provide proof of legal protection and can suffice with indicating in what way the intangible asset is novel, inventive (non-obvious) and has industrial application (useful).
- Procedure & costs – The BTP will decide on the request within 3 months after all required documentation is provided. The costs due to the BTP in relation to the R&D-declaration amounts to NAf 3,500.
After an R&D-declaration is obtained, the taxpayer is allowed to opt for the application of the innovation box for profit resulting from the qualifying intangible asset(s).
Innovation box regime
Under the innovation box regime, profit attributable to self-developed intangible assets that result from qualifying R&D-activities for which an R&D-declaration is obtained, are subject to a profit tax rate of 0%. Specific conditions should be met before the innovation box can be applied. Please find the most relevant conditions and other considerations below.
- Entrance ticket(s) – The first entrance ticket to be eligible for the innovation box regime is an R&D-declaration. For small companies (defined below), this is the only entrance ticket to be eligible for the innovation box. Large companies also require a second entrance ticket, namely a patent, registered trademark or similar legal protection of their intellectual property.
- Intangible assets –There is no limited list of intangible assets. Examples of intangibles assets are patents, software, exclusive licenses, copyrights and trademarks. Some intangible assets are however explicitly excluded for the application of the innovation box. These are brands, logo’s and similar intangible assets.
- Large or small company – A company qualifies as a small company for the application of the innovation box in case (i) the profit in relation to the qualifying intangible assets in the last five years is lower than NAf 75,000,000 and (ii) the consolidated net-revenue of the concern in the last five years is lower than NAf 500.000.000.
- Qualifying profit – Calculating qualifying profit is complex and there is no specific calculation method. Qualifying profit is typically determined based on various factors, such as: the use of qualifying intangible assets in a product or service, the function of innovation within the business, transfer pricing methodology and the contribution of qualifying intangible assets to the profit.
- Nexus approach – The application of the innovation box is potentially limited when R&D-activities are outsourced to foreign group companies. In that case, the ‘nexus approach’ applies and the R&D-costs attributable to the foreign activities should be determined. Based on the foreign R&D-costs (with a 30% uplift) set against the total R&D-costs, the tax benefit may be limited.
- Applying the innovation box – A taxpayer can opt for the application of the innovation box in its profit tax return. It is not required to obtain prior approval or a tax ruling for applying the innovation box. However, given the complexity of determining qualifying profit, we advise to obtain professional advice before doing so and/or discuss applying the innovation box with the Tax Authorities.
- Tax years – Taxpayers can opt to apply for the innovation box regime as of tax period 2018. If an R&D-declaration is obtained for qualifying R&D-activities in relation to tax period as of 2018 and final tax assessments have not been issued yet (or objections can still be filed), it may still be possible to apply the innovation box as of tax period 2018.
It is recommended to conduct a high-level internal assessment of the potential opportunity to apply the innovation box before taking steps to file the application. Our checklist can be used to conduct this initial assessment.
We would like to emphasize that the above described is general information and may not be considered as tax advice for any specific case.
Our tax professionals will be glad to assist you at any time with any questions you may have.