Research and development (R&D) is now being encouraged by the government through a tax credit on wage tax and national insurance contributions as well as on the ‘eindheffingsloon’ (wages subject to a final levy) of an employee who is involved in research and development activities. Conditions apply, of course. Your job is to apply this tax credit correctly when filing your payroll tax return.
If you are eligible for a tax credit, you will pay less wage tax, national insurance contributions and ‘eindheffing’ (final levy) than filed during the payroll tax return. In other words: advantageous. Each and every tax credit has been created with a specific goal in mind; for example, encouraging employment opportunities. As for 2021, there are three tax credits your organization may be eligible for. First, there is the maritime transport tax credit (‘afdrachtvermindering zeevaart’ in Dutch) for seafarers who work on a Dutch ship. Second, as of January 1, 2021 there is the BIK tax credit for job-related investments, with the goal to encourage such investments. And finally, there is the research and development (R&D) tax credit (‘afdrachtvermindering speur- en ontwikkelingswerk’ in Dutch) in order to encourage research by organizations. The latter tax credit will be discussed in more detail below.
If your organization is involved in research and development activities, the ‘Wet bevordering speur- en ontwikkelingswerk’ (Research and Development Encouragement Act), abbreviated as WSBO, allows you to apply for a tax credit on (labor) costs incurred through R&D activities. In 2021, such activities include:
- development of a product, a product process or software;
- doing technical-scientific research, referred to as TWO in Dutch.
If your organization is involved in any of these activities, you can apply for the R&D tax credit. You are also eligible for the tax credit if you have incurred expenses on (or associated with) innovation.
The government has reserved more money for the WSBO this year. The following brackets apply to the R&D tax credit in 2021:
- a 40% tax credit (this was 32% in 2020) for the portion of labor costs, remaining costs and expenses on research and development up to € 350,000;
- a 16% tax credit for the portion of such costs and expenses in excess of € 350,000.
For new businesses, the tax credit applicable to the first bracket is 50% instead.
The amount of R&D tax credit is only based on the labor costs of employees involved in research and development. These employees in question must have an employment contract with your organization (i.e. no on-call workers, interns, etc.), although a few exceptions apply. Although the tax credit is only based on the labor costs of employees involved in R&D, the tax credit may be applied to the total amount of wage tax and national insurance contributions due of all employees combined.
How to apply a corrected R&D declaration?
What happens if the total of hours spent on research and development activities or the total costs and expenses turn out lower than those stated on the R&D declaration? In that case, you will receive a corrected R&D declaration (‘correctie-S&O-verklaring’ in Dutch) from the Netherlands Enterprise Agency. This corrected R&D declaration will state one corrected amount for all R&D declarations of that calendar year.
How to apply the corrected amount depends on how much R&D tax credit you have already deducted. There are three possibilities:
- When deducting the R&D tax credit, you have taken into consideration the actual hours (and costs and expenses) on research and development. In that case, no corrections need to be made.
- If you have deducted the original amount of tax credit (almost) in its entirety, you must pay back the excess amount after having received the corrected R&D declaration.
- If you have deducted no R&D tax credit or less than the corrected amount stated in the corrected R&D declaration, you can use up whatever reduced amount of tax credit you now have left. You must apply for a correction in the already filed payroll tax returns filed during the calendar year to which the R&D declaration applies. Make sure to never deduct more tax credit than the total in wage tax, national insurance contributions and ‘eindheffing’ (final levy) due.
The R&D tax credit must always be applied for before the start of an innovation project. An R&D declaration (‘S&O verklaring’ in Dutch) must be obtained from the Netherlands Enterprise Agency, which can be applied for online on www.rvo.nl. During the application, you must give an estimate of the number of hours the employees in question are expected to be involved in research and development. There must be a clear connection between the stated costs and R&D activities. Moreover, the costs must be 100% attributable to the project.
The Netherlands Enterprise Agency is working on a new online portal for the applications. At the moment, the portal can only be used to apply for subsidies; and only if you file the application yourself. You will need the online authentication and authorization system ‘eHerkenning’ at safety level of eH2+ or eH3 in order to file the application. But as of July 1, 2021, safety level of eH3 will be required for all application.
Once your application has been (partly) approved, you will receive an R&D declaration from the Netherlands Enterprise Agency stating the amount of tax credit you can apply during the payroll tax return. After receiving the declaration, your organization must keep a record of all R&D details. Such details include e.g. the progress of the research and development activities as well as the hours spent on them. A model Excel sheet for this recordkeeping can also be found on www.rvo.nl. Once the project has been completed, you must always inform the Netherlands Enterprise Agency of the number of hours actually spent on R&D, even if this number is zero. Do so within three months after the end of calendar year to which the R&D declaration applies, i.e. on March 31 at the latest. The R&D records must be made available for inspection within two months after the end of the quarter in which research and development was done. And the timesheet of R&D activities must also be made available for inspection within ten workdays after the day on which the respective activities were done.
In order to be eligible for the R&D tax credit, the innovation or research in question must take place within the European Union. The United Kingdom is no longer part of the European Union! Your organization must also pay corporate or income tax in the Netherlands and cannot be a public educational institute. Furthermore, your organization must pay payroll tax for the employees who will be conducting the research and development.
Payroll tax return
When filing your payroll tax return, you must deduct the total amount of R&D tax credit per tax period from the withheld wage tax and national insurance contributions and ‘eindheffing’ (final levy) due. However, the total in wage tax, national insurance contributions and final levy may never be a negative amount once the tax credit has been deducted. You may round up total amounts in your favor to the nearest whole number in euros, but you may not do so for the individual amounts per employee. The R&D tax credit may only be used in tax periods which end during the period to which the R&D declaration applies. During those tax periods, you will deduct at most a proportional amount of the still unused portion of the total amount stated in the R&D declaration. If you have a payroll tax number with different sub-numbers, for example L01 and L02, the tax credit can be subdivided between the different sub-numbers as desired. And if by the end of the period to which the R&D declaration applies a portion of the tax credit has not yet been used, this remaining portion may be set off against payroll tax due in any of the tax periods in the calendar year to which the R&D declaration applies – if there is still room for this financially, of course. In that case, you can apply to the Belastingdienst (the Dutch revenue service) for a correction of the payroll tax already paid; unless you set off the remaining portion against payroll tax due in an upcoming tax period, in which case a correction is of course not necessary.