Tax reliefs: IP Box and R&D

IP Box and R&D Relief – Tax regulations encouraging innovation and intellectual property creation

Rationale behind the rules

Whilst, in general terms, rates of Polish Corporate Income Tax (CIT) and Personal Income Tax (PIT) tend to be on the increase, over recent years regulations have introduced certain reliefs intended to limit the taxation burden in selected areas of the economy. One such measure is the 'IP Box' relief which was introduced with the aim of encouraging economic activity associated with the innovation and creation of intellectual property.

This serves as a good example of a situation where tax is being used as means to encourage a particular type of economic activity which is viewed as being beneficial for the State in general.

Mechanics of the IP Box

Qualifying income
The so called 'IP Box' incentive mechanism is available both to individual persons running their own business activity (subject to PIT) or to corporations (subject to CIT). It offers them a preferential 5% tax rate on qualifying Intellectual Property (IP) income.

Qualifying income is defined as proceeds from patent rights, copyrights over protected designs (commercial, industrial, electronic chips), rights to pharmaceutical registered products, agricultural IP, as well as computer program copyrights.

It is mandatory that the income relates to formally registered/patented IP rights and that the IP was actually created, developed or enhanced by the taxpayer concerned.

The relevant income may be derived both from the sale and from the licensing of such rights.

Calculation of the incentive
The IP Box regulations specify how to calculate the qualifying income which is subject to the preferential 5% rate.

As the regulations are aimed at encouraging self-development of IP by taxpayers, the rules exclude from the preferential rate any income derived from a simple re-sale/ licensing or other trading of IP which has not actually been developed by the taxpayer themself. But since IP is rarely produced entirely in-house, the regulations provide for a slightly complex formula in order to allow for this, and to ascertain the basis for the preferential 5% rate.

The formula is given as follows:

Where:

• 'a' represents the taxpayer’s own direct costs of R&D activity (for example, payroll of researchers, programmers, research materials costs, etc.)
• 'b' represents the costs of acquisition of results of R&D work from unrelated parties
• 'c' represents the costs of acquisition of results of R&D work from related parties
• 'd' represents the costs of acquisition of IP rights (both from related and unrelated parties)

It should be noted that indirect costs, such as those related to financing or real estate, are excluded from the above equation.

In addition, if the factor in the above equation produces a value of greater than 1 (this is technically possible if the values for 'a' and 'b' are dominant, since they are being multiplied by 1.3 in the top part and not in the bottom), then the value of the factor which is multiplied by the qualifying (IP) derived income is reduced to 1.

The following example is based on a company with recorded income from sales of IP of PLN 10,000,000 and with the following direct costs relating to R&D:

• a – payroll of researchers creating IP sold of PLN 2,000,000
• b – acquisition of results of R&D work from unrelated parties of PLN 700,000
• c – acquisition of results of R&D work from a related company of PLN 800,000
• d – acquisition of software used in research: PLN 1,500,000

In this example, the income qualifying for the preferential tax rate would be calculated as:

PLN 10,000,000 x {[(2,000,000+700,000)*1.3]/[2,000,000+700,000+800,000+1,500,000]} = 10,000,000 x 70,2% = 7,020,000

Thus, the tax on the income (assuming that the company has no income other than its sales from IP) would be calculated as:

PLN 7,020,000 x 5% + [10,000,000 – 7,020,000] x 19% = 351,000 + 566,200 = PLN 917,200

This therefore results in an overall effective rate of tax of just above 9%, as opposed to the standard rate of CIT of 19%.

R&D relief

The preferential IP Box taxation regime should be distinguished from R&D relief which allows taxpayers to reduce their standard tax basis by the amount of any qualifying R&D related costs.

This effectively means that such costs qualify for a double deduction; firstly by being deducted from revenues when calculating taxable income, and then by way of an additional deduction to give the taxable base.

This type of relief is closely linked to the definitions of R&D activity (which can comprise both basic/elementary studies and practical implementation studies) and specific R&D costs (payroll, materials, use of lab equipment, depreciation of dedicated equipment etc).

The total amount of relief is capped by reference to the amount of taxable income (excluding dividends and capital gains basket). Further limitations are provided by the public aid caps.

Tutorial note – in view of the detailed regulations on R&D activity and public aid, exam questions relating to R&D relief will provide information on whether the activities or expenses qualify as R&D related, and will state whether the public aid limits are available. 

Written by a member of the TX-POL examining team