IP Box relief - on what terms is it granted?
Taxpayers conducting research and development activities from January 1, 2019 may take advantage of preferential taxation of income obtained from created or improved qualifying intellectual property rights in the amount of 5% of PIT or CIT. What is the IP Box tax relief and who does it apply to? We explain in the article.
IP Box relief - basic information
The tax preference in the form of the IP Box relief was introduced on October 23, 2018, under the Act amending the Personal Income Tax Act, the Corporate Income Tax Act, the Tax Ordinance Act and certain other acts, and is effective from January 1, 2019. r. The assumption of the introduced changes is to stimulate the market of new technologies and innovative solutions by introducing preferential taxation of 5% in PIT and CIT (for income obtained from qualified intellectual property rights), instead of:
17/32 percent (general principles of PIT),
19 percent (flat PIT tax),
9/19 percent (CIT).
However, obtaining the tax relief is subject to regulations. The most important requirements that must be met include:
conducting research and development activities;
creating a qualified IP (qualified intellectual property right) as part of the research and development activity;
keeping a separate record of economic events covering all financial operations related to income from qualified IB, in accordance with art. 24e paragraph. 1 point 1 of the CIT Act and art. 30cb paragraph. 1 point 1 of the PIT Act;
achieving income from qualified IP, subject to taxation in Poland;
incurring eligible costs in connection with the creation, development or improvement of the eligible IB.
The basis for granting the IP Box relief is the fulfillment of the statutory conditions, while confirmation of the correctness of its application is, among others, obtaining a positive opinion of the tax authorities in the individual interpretation.Details on the application of the tax relief and the entitled entities are indicated in a special explanation issued on July 15, 2019 by the Ministry of Finance on the preferential taxation of income generated by intellectual property rights - IP.
Tax explanations regarding the IP BOX.pdf Description:
Research and development activities and IP Box relief
The main determinant of research and development activity is its creative character. In the PIT Act, Art. 5a point 38 or the CIT Act Art. 4a point 26, research and development is defined as "[...] creative activities involving research or development, undertaken in a systematic manner in order to increase knowledge resources and use knowledge resources to create new applications [...]". The creative nature of research and development activities increases knowledge in a given field, which may translate into the creation of new processes, products or services. As part of research and development activities, scientific research (basic, applied, industrial) and development works are carried out. Scientific research is mainly experimental or theoretical activities, the main goal of which is to acquire new knowledge and skills. Development work, on the other hand, focuses on using the available knowledge to create new or improved services, processes or products, these activities are not routine activities.
As previously indicated, one of the conditions that must be met in order to take advantage of the IP Box tax relief is conducting research and development activities, while the other is creating a qualified IB.
Qualified IP in theory
The list of eligible intellectual property rights for which a preferential income tax rate can be applied is provided in Art. 30ca paragraph. 2 of the PIT Act and Art. 24d paragraph. 2 of the CIT Act and it is a closed catalog. According to the Act, the qualified IBs include:
protection right for a utility model;
the right to register an industrial design;
additional protection right for a patent for a medicinal product or a plant protection product;
the right to register a medicinal product and a veterinary medicinal product authorized for marketing and the exclusive right referred to in the Act on the legal protection of plant varieties;
right in registration of integrated circuit topography;
copyright to a computer program
- subject to legal protection on the basis of the provisions of separate acts or ratified international agreements to which the Republic of Poland is a party, and other international agreements to which the European Union is a party, the subject of protection of which has been produced, developed or improved by the taxpayer as part of his research activities development.Granting one of the above rights (patent) is made by the patent office on the basis of a subsequent substantive control in the registration or application process. In the case of the right from the registration of the topography of an integrated circuit and the copyright to a computer program, no substantive control is carried out, the office only performs a formal assessment of the application.
Detailed explanations regarding the classification of the above intellectual property rights are explained in the Industrial Property Law Act and in the Copyright and Related Rights Act. Obtaining patent protection proves the originality of the IP generated.
The tax preference covers only the income from qualified IBs. In the event of the expiry of the patent right, the tax preference ceases to apply. Income derived from intellectual property rights after the expiry of the right of protection is subject to taxation in accordance with the declared form of taxation, without applying any preferences.
A taxpayer who, as part of his research and development activities, creates a qualified IB and grants an exclusive right to this IP to another entity, for the income obtained on this account, after meeting certain conditions, will be able to apply a preferential tax rate of 5%. The preferential tax rate will also be able to be applied by a taxpayer acquiring qualified IB for the purpose of its further commercialization and development as part of research and development activities.
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IP Box relief - authorized entities
The preferential income tax in the amount of 5% (for income from qualified intellectual property rights) may be used by taxpayers conducting research and development activities subject to PIT or CIT tax, which include:
Subject to PIT tax:
- sole proprietorships,
- partners of a civil law partnership,
- partners of a general partnership,
- partners of a partner company,
- partners of a limited partnership,
- companies in decline;
Covered by CIT:
- legal persons,
- capital companies in organization,
- organizational units without legal personality, with the exception of inherited enterprises and companies without legal personality (with some exceptions),
- limited joint-stock partnerships with their seat or management board in the territory of the Republic of Poland,
- tax capital groups,
- companies without legal personality having their seat or management board in another country, if the law of that country treats them as legal persons and they are subject to taxation on all their income regardless of where they are earned.
The preferential 5% tax rate under the IP BOX relief may be used by the taxpayer in relation to income earned abroad, as long as this income may be income from qualified IP within the meaning of the IP Box regulations and is actually taxed in Poland.IP Box relief applies to income from qualified IPs taxed on the territory of Poland. The preferences are not available to natural persons conducting business activity taxed with a lump sum on recorded income.
Calculation of income from qualified IP
As indicated in art. 30ca paragraph. 7 of the PIT Act (by analogy, Article 24d (7) of the CIT Act), the income for which the IP Box relief can be applied is the income obtained from the eligible IB in the form of:
profit from the sale of qualified IP,
receivables received under license agreements for qualified IP,
profit from qualified IP included in the selling price of the product or service,
compensation obtained in litigation (court or arbitration) proceedings for violation of rights under qualified IB.
As a rule, the tax base with the preferential income tax rate of 5% is the product of the income from eligible IP and the nexus ratio.
The nexus index is calculated according to the formula:
n = (a + b) x 1.3 / (a + b + c + d)
the individual letters of the formula mean the costs:
𝒂 - research and development activities related to the eligible IB;
𝒃 - acquired results of research and development related to the qualified IB, from an unrelated entity, indicated in art. 23m of paragraph 1 point 3 of the PIT Act (similarly to Article 11a (1) (3) of the CIT Act);
𝒄 - acquired results of research and development related to the qualified IB, from the related entity indicated in art. 23m of paragraph 1 point 4 of the PIT Act (similarly to Article 11a (1) point 4 of the CIT Act);
𝒅 - acquired by the qualified taxpayer IP.The nexus indicator shows the amount of eligible costs and is determined individually for each eligible IB separately. If the taxpayer, as part of his research and development activity, works on more than one qualified IB, in order to benefit from the tax relief, he will be required to calculate the nexus ratio separately for each eligible IB.
The amount of the IP Box relief that can be applied is the difference between the value of the tax paid during the year based on the applicable income tax rate and the tax amount calculated based on the preferential 5% rate.
The calculation of the income from the qualified IP for which preferential taxation can be applied is made according to the formula: D x n, where:
D - income from qualified IB,
n - nexus pointer.
The value obtained in accordance with the above formula is the taxable amount with a preferential income tax rate of 5%.
Documenting method for the needs of the IP Box tax relief
Among the main requirements for people who want to take advantage of the IP Box tax relief is the documentation requirement. Taxpayers benefiting from the relief are required to keep separate records of all economic events - both those related to the IP Box relief and other related to their business. The records should present the total sum of revenues, costs, income, losses obtained in a given period, detailing the income for which the 5% income tax rate can be applied and other. Economic transactions related to the relief, similarly to the R&D relief, should be specified in the KPiR (in the form of a spreadsheet) or in the accounting books (using the auxiliary books account). In the case of taxpayers keeping the KPiR and using the records of economic events in the form of a spreadsheet for the purposes of the IP Box tax relief, monthly statements of expenses should be included in it in cumulative amounts. However, they do not have to keep such detailed records as entities keeping full accounting.
Entities that work on creating more than one qualified IB as part of their research and development activities are required to keep separate records for each project. The records should additionally include a description of the project, its duration (from its commencement to its completion), a list of all people working on the project with a specification of the works created by them.In the case of taxpayers conducting research and development activities who have created, developed or improved qualified IB and incurred the related costs before January 1, 2019, but are not able to determine their amount because they did not previously record economic events, they may assume the amount costs incurred after December 31, 2018. However, if after that date the taxpayer no longer incurs any costs, then he may take into account the costs incurred in previous years (assuming that they were not previously tax deductible costs), however, limited to 31 December 2012 r. Doubts are also raised by the frequency of keeping additional records for the purposes of settling the IP BOX relief. In the individual ruling of January 7, 2020, ref. No. 0113-KDIPT2-3.4011.589.2019.2.SJ Director of the National Tax Information stated that "(...) the fact of preparing (presenting or possessing) a separate register in the future only for the purpose of using the IP Box does not fulfill the premise of Art.30cb (1) and (2) of the Personal Income Tax Act. Creating a separate register in the future. only in order to fulfill the obligation resulting from the above-mentioned provision, even in a situation where it will be possible to correctly determine the tax base with the rate of 5%, it prevents the application of a preferential tax rate on the obtained income. " It is also worth paying attention to the judgments issued, which show that the lack of current records for the purposes of the IP BOX relief does not exclude the right to apply a preferential tax rate. An example may be the judgment of the Provincial Administrative Court in Gorzów Wlkp, file no. I SA / Go 115/20 in which we read: "For the purposes of calculating the eligible income of IP, it is important that the records are properly kept, so as to be able to show the total sum of tax revenues and costs, income, losses, and income taxable at 5% in the annual tax return. The purpose of the records of expenses is to calculate the tax base. The records are to be prepared in a way that achieves the indicated purpose. If this purpose is fulfilled, it should be considered as kept in a proper manner. (...)
However, in the opinion of the Court, improper keeping of the records referred to in Art. 30 cb paragraph. 2 of the Personal Income Tax Act is such that it is impossible to determine the correct tax base with the rate of 5%, which does not contain the information referred to in Art. 30 cb paragraph. 1 of the aforementioned act. If the records meet the indicated purpose as at the settlement date, they cannot be considered incorrectly kept.
(...) In the opinion of the adjudicating panel, in relation to both the books of accounts and records, the most important element is the verifiability and correctness of the information referred to in Art. 30 cb section 1 of the Personal Income Tax Act. "
To sum up, the use of the IP Box relief is possible only with regard to income obtained from qualified IBs produced, developed or improved as part of the conducted research and development activity. Taking advantage of the discount is possible after meeting, among others, registration requirements. Therefore, if you want to take advantage of the tax relief, it is worth applying for an individual interpretation.