Rockstart Law School: Public funding in the Netherlands
Setting up and running a startup requires knowledge of the industry that you are in. It also requires knowledge about finance, marketing, customer service, management, and legal matters. There is no way of knowing everything you need to know, which is why the network that supports you becomes a valuable tool and asset.
Rockstart Law School is a combination of blog posts by outside contributors and vlog posts by Rockstart’s very own legal counsels Els Metten and Lisette Schuilwerve. They will show the roadmap to the legal side of starting and running a startup company. Rockstart Law School focuses on the Dutch law system and is meant as a resource and gives you lessons learned and suggestions, but is not meant to be used in the place of legal advice. Always consult your lawyer, but we hope these series of posts will give you a greater understanding of the legal needs and points of attention that you may encounter during your startup journey.
By definition, entrepreneurs aspire to build a strong disruptive company in an environment where success is not guaranteed. Getting there means gaining the necessary traction and managing your burn rate, while keeping an eye on the remaining runway. One way of extending this runway is by using public funds, also known as grants or subsidies. These are instruments offered by the government to stimulate startup growth and success.
In this post, we’ll go over two of the most important public funding instruments: the WBSO and the Innovatiebox.
WBSO, or R&D Tax Credit
The WBSO (also known as the R&D tax credit) lowers wage costs for professionals building innovative technologies. Hours invested in it by your R&D team amount to a benefit in the form of a tax reduction.
Your WBSO application must describe your R&D project(s) and provide an estimated amount of R&D hours spent. While it’s best to scope your activities for the next 2—3 years, the application period commonly spans six months. This means that every half a year you’d need to turn in a new application, updating your project description and time estimations to align with your new situation.
What’s the benefit?
Your benefit amount is dependent on two things. While established companies are limited by the amount of R&D hours they can make, startups commonly hit the ceiling in another aspect—the sum of their payroll tax.
1.The benefit is dependent on the amount of hours your R&D team spends innovating. In 2017, WBSO can lead to an annual saving of €28,000 for an R&D effort of 1 FTE (some 1,800 hours). This is calculated by first multiplying your R&D hours by an average hourly wage of €29, and then adding a fixed €10 per hour for the first 1,800 hours and €4 per hour for the rest. Together, this sum represents your gross wages. The benefit for startups amounts to a 40 percent reduction over the first €350,000 of gross wages and 16 percent over the rest.
2. The benefit is limited by the amount of payroll tax you’re paying, since it’s offered as as a deduction of this tax (and social security contributions) due by your BV (“loonbelasting” and “premie volksverzekeringen”). Obviously, this amount can’t be reduced below zero. What usually happens is that a startup’s benefit is bottlenecked by the amount of these taxes owed in the application period by the entire BV (i.e. payroll taxes for all employees, not just R&D personnel).
Am I eligible?
You are, as long as your startup is incorporated in the Netherlands (preferably as a BV), and pays wages to an R&D team located in the country. Eligible projects can entail development of software, physical products, or production processes; projects financed by your clients also qualify for WBSO. The rule of thumb here is that projects must be technically new for your company and encompass technical risk.
WBSO-eligible R&D activities must be aimed at solving technical challenges and not be routine in nature. Activities that qualify include technical design, engineering, programming, prototyping, technical testing, and so on. Note that software development projects are subject to strict criteria in order to be deemed technically new (and eligible for WBSO).
Important Tips and Tricks
- Although there are fiscal benefits to paying wages from your respective holding BVs, hold this off for the first year. Paying everyone’s wages from your operating startup company (“Startup BV”) instead for the first year or two has three big advantages. First, since a unique WBSO application must be done per BV, pooling everybody’s efforts into one BV increases the success rate. Second, pooling everybody’s payroll tax into one BV maximizes the amount of deductible tax—and thus the benefit. And most importantly, you’d definitely want your WBSO application to cover all your R&D efforts for maximum Innovatiebox benefits in the future (see more below).
- R&D activities can be unpredictable, unsure, and incidental. However, subsidy providers require a detailed description of the R&D project up front. Make sure you’ve included as much of your activities as possible in order to minimize the risk of not being able to attribute R&D hours to your WBSO projects.
- Timing is important: your application period starts after a full calendar month’s wait after the submission. For example, an application submitted in the middle of January means the full calendar month of February is considered a ‘wait-month,’ meaning your WBSO project starts on March 1. Be aware of when you expect to pay wages to technical employees and start your application process accordingly. If you need to buy a few weeks’ time, you might consider applying for an extension (“vormvrije aanvraag”) before the end of the month.
- During your project’s application period, you can tune your hours down, but not up. Therefore, it is best to go by the best case scenario, providing room for including prospective growth (e.g. new hires) within the WBSO.
- Proper administration of project activities and hours spent is crucial for preventing fines or paybacks.
If you’re an ambitious startup pursuing expansive growth and large profits, you’ll want to take the necessary steps now to avoid paying substantial corporate profit taxes (“vennootschapsbelasting”) in the future. This is where the Innovatiebox comes in play, a special tax bracket for profits from R&D. A successful application for Innovatiebox would mean that the tax rate for profits from R&D for you would be lowered by 80 percent (commonly from 25 percent to 5 percent).
What can I do now?
For a fresh startup, the first step is simple: cover as much of your R&D efforts as possible with the WBSO, as this acts as your entry ticket into the Innovatiebox. When profits start to rise, a case will have to be made for the Tax Authority, emphasizing that all your R&D efforts are accountable to your WBSO projects. If done right, an Innovatiebox ruling could be made where more than half of your startup’s total profits are taxed at an 80 percent discount—for a duration of about six years.
When thinking about using public funds, always keep in mind that correct fiscal structuring up front is necessary to retain your right to the Innovatiebox. The BV, under which you apply for the Innovatiebox, is the BV where your profits, R&D team, IP, and your WBSO history should all be. Right to Innovatiebox is non-transferable to other BVs.
Daniel van Dijk is a senior consultant at Ugoo. As a startup expert, Daniel supports startups in the Rockstart Web & Mobile Program. With his IT-expertise, he has helped more than 120 companies successfully find their way to public funding, and currently manages a client portfolio of leading innovative companies, from many (Rockstart) startups to “the biggest creative digital production company on the planet”.
Ugoo is a subsidy intermediary specialized in acquiring subsidies for innovative tech startups. Our young team of dedicated specialists work on varied subsidy projects, helping startups to obtain their goals and chase their ambitions. Our proactive approach and no-cure-no-pay fee means we take everything off your hands, including the risk.
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