The preferential 5% rate of CIT/PIT isn’t for everyone though – it only applies to companies which earn revenues from intellectual property rights.
5% tax – what is it about?
IP Box is a tax incentive which allows companies that are involved in R&D to take advantage of a preferential tax rate. It may turn out beneficial especially when it’s mixed with already-existing R&D relief, since one affects income, while the other one affects tax costs. And the 5% tax may also be mixed with operating within a Special Economic Zone or with getting Polish Investment Zone support.
The cooperation of costs and incomes mentioned above is key to see whether the IP Box is applicable in the company: it’s only possible if the final product was made or upgraded as a direct result of the R&D activity. According to the OECD’s explanation, it’s important to exclude costs that aren’t directly connected with producing, improving or upgrading the qualified IP. As an example of inability to tell if the product is directly connected with the qualified IP the following may be the following: building costs (acquisition or maintenance costs), car leasing, administrative costs, additional accounting services or tender costs.
The aim of 5% tax for companies which produce (or use) intellectual property is to urge investors and entrepreneurs to keep their businesses in Poland and stimulate their development there. When it comes to more precise goals, they are:
Increasing of tax revenues (as a result of unblocking intellectual property rights)
Giving an organic boost to investment in innovation
Increasing the number of well-paid jobs across the economy
Crafted for (some) entrepreneurs
The matter itself isn’t as simple as it seems – an entrepreneur has to be directly performing the R&D activity and also be the owner, co-owner or a user of qualified IP.
What must the company have to be eligible to apply for the 5% tax rate?
Protected right to software
Protection rights for a utility model, rights arising from the registration of industrial designs or registration of topographies of integrated circuits
Rights arising from the registration of medical products or authorised veterinary products
Rights arising from the registration of varieties of plants and animal breeds
Additional protection rights arising from the patent for a medical product or plant protection product.
And any of the mentioned above must have its own and detailed evidence of incomes and costs, for every single product. As opposed to the well-known R&D relief, an Excel file won’t be enough in the case of IP Box. This is because separate auxiliary accounts will be demanded to extract details of the exact operations. Of course, for companies it will result in increased costs caused by additional work for the book-keeping department. If the company meets the conditions, it’s allowed to take advantage of the IP Box. It’s difficult to raise the issue that arises in practise, because very few – if any – companies decided to implement IP Box in 2019.
Bear in mind that claiming the IP Box relief may automatically trigger a tax-office inspection – just as it happens in case of R&D relief. When R&D relief was introduced, almost a half of all the companies that had decided to use it were later subject to a tax-office inspection. Taking into consideration the complicated accounting process associated with the IP Box, such inspections may happen even more frequently.
The basic requirement for intellectual property companies (achieved by implementing the nexus approach) is that they have to conduct a substantive activity. It means that the revenues connected with intellectual property may be beneficially taxed only if the concrete IP is an effect of the taxpayer’s R&D activities. Its aim is limiting the possibility of taking advantage of a preferential tax regime when the intellectual property wasn’t produced by the taxpayer themselves (which means that it could be bought from third-part companies or related companies). Having taken into consideration the complexity of business processes, the OECD/G20 countries accepted a modified version of the nexus approach, which allows taxpayers to increase their qualified costs (those that are included in calculation) by 30%.
The question on everybody’s lips is probably “Is it going to be worth it?”. Unfortunately, there’s no one answer to it – every case has to be judged individually.
Let’s assume that in a company:
The sum of income from IP is 10m zlotys
R&D costs connected with qualified IP rights are 1.5m zlotys
R&D acquisition costs from the firm’s subsidiary are 150,000 zlotys
R&D acquisition costs for qualified IP law are 300,000 zlotys
The company will save 1.4m zlotys.
We predict that the major recipient of IP Box will be IT sector – because in its case it’s easiest to earn copyright for computer programs (it doesn’t demand any formal registration). But a lower tax rate should also be of interest for pharmaceutical or chemical companies and for PIT taxpayers (IT specialists developing codes).
Innovation Box in Europe – a great success?
IP Box has been already implemented in other countries – in Europe and in the rest of the world, though its rules vary depending on a country. In most of them it’s considered a success. In France and Turkey, however, the functioning of the IP Box was deemed to be detrimental tax competition by OECD/G20. Having said that, the French government doesn’t plan any changes regarding this fact!
Time will show whether the IP Box turns out a success in Poland – the prospects are promising and offer the companies the possibility to develop greatly via tax reduction. Can we expect any further relief for creative entrepreneurs? It seems that R&D credit and IP Box doesn’t leave the legislation many ways for expanding further. It’s no bad news though, since mixing those two together does create an opportunity for really effective tax optimisation.