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Developing a new product or service or improving processes within a company often requires substantial investment. Entrepreneurs who make such an investment may, however, use various reliefs and grants to help carry out the project. What is R&D relief? R&D relief supports research and development activity and has become more attractive in recent years thanks to
What is R&D relief?
R&D relief is an instrument supporting research and development that has become more attractive in recent years thanks to favourable changes in how deductible costs are calculated. Following the entry into force of the act amending certain laws to improve the legal environment for innovative activity, every entrepreneur conducting R&D work has been able to deduct up to 100% of the expenditure incurred from 1 January 2018. R&D relief is an especially attractive way to support innovation because it requires no complicated application process. Based on R&D expenditure incurred in a tax year, the entrepreneur calculates the relief, which reduces the tax base.
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R&D relief allows the PIT/CIT tax base to be reduced because of research and development expenditure. As a result, research or development costs can be included twice for tax purposes.
Revenue – tax-deductible costs (including R&D costs) = income
Income – deductions (e.g. ZUS) – R&D relief (equal to R&D costs) = tax base
An inconvenience of R&D relief is the need to keep separate records of research and development costs. Not all costs can be included in calculating the relief. However, a one-off effort to adapt accounting records for R&D relief will pay off in later years through lower income tax.
List of eligible costs, that is, costs deductible under the relief.
Eligible costs are expenditure included in the catalogue of eligible costs established under tax law.
The catalogue is defined in Article 18d of the Corporate Income Tax Act and Article 26 of the Personal Income Tax Act. It includes costs of:
- labour
- purchasing materials, raw materials and equipment
- expert assessments, research and opinions
- obtaining protection rights for inventions and utility and industrial designs
- depreciation of fixed assets
Labour costs
Labour costs include amounts paid as remuneration under employment, mandate and specific-work contracts (on a monthly basis). Eligible costs are basic pay and all kinds of additional remuneration, such as bonuses and allowances. Social-insurance contributions accrued and paid in connection with those contracts are added to remuneration costs.
Costs of materials, raw materials and equipment
Under tax law, eligible costs include expenses for purchasing materials, raw materials and specialised equipment (other than fixed assets). Costs of using scientific and research apparatus as an external service can also be deducted from the tax base.
Costs of expert assessments, research and opinions
A business using R&D relief may count expenditure on expert assessments, opinions, advisory services and similar services as eligible costs. Eligibility in this respect depends on the entity providing the service. Remuneration paid to universities, federations of universities or institutes of the Polish Academy of Sciences can be deducted from the tax base.
Costs of obtaining protection rights for inventions and utility and industrial designs
Research and development results are quite likely to receive copyright protection. Their creator may also be able to protect them under industrial property law. Costs incurred in obtaining and maintaining a patent, a utility-model protection right or an industrial-design registration right qualify for deduction under R&D relief.
Depreciation – fixed and intangible assets
Depreciation of fixed assets and intangible assets used in R&D also counts as eligible costs. In principle, depreciation of passenger cars, buildings, structures and premises should be excluded.
Depreciation of development-work costs
Entrepreneurs accounting for depreciation of development-work costs may deduct it from the tax base to the extent that it covers the expenditure listed above.
Special rules for entities with research and development centre (CBR) status
The above restrictions do not apply in full to entities with R&D centre status. Tax laws grant them certain privileges. For example, CBRs are not subject to the restriction that expert-assessment costs be purchased only from universities or Polish Academy of Sciences institutes. Entities with CBR status can deduct depreciation of fixed assets in the form of structures, buildings and premises under the relief.
Inability to deduct costs
The taxpayer deducts eligible costs from the tax base. If the taxpayer reports a loss or cannot deduct all eligible costs, the costs can be deducted in the six consecutive years after the year in which the relief became available.
Cashback
Tax law provides an interesting solution for start-ups in their first year. If they cannot deduct eligible costs from the tax base, they need not wait until an opportunity arises later. The tax office pays them the amount by which the tax would have been reduced through the relief. This also applies in the second year of operation for micro, small and medium-sized entrepreneurs.
What is IP Box?
IP Box provides preferential taxation of income from selling products or services created on the basis of intellectual property rights. It is intended to make R&D activity in Poland more attractive and encourage entrepreneurs to seek business potential in intellectual property rights more boldly. This is an important step towards a knowledge-based economy.
Who can use IP Box?
Entrepreneurs earning income from intellectual property (IP) arising from their R&D activity or from R&D services purchased from others but patented by themselves may use a preferential CIT or PIT rate. A necessary condition for IP Box is conducting R&D directly connected with the creation, development or improvement of a qualifying intellectual property right.
Using this solution requires meeting several axioms.
Axiom 1
Income from intellectual property rights
Under the law, the 5% tax rate can be applied only to income from the intellectual property rights specified in the act, called qualifying intellectual property rights.
The qualifying rights eligible for the 5% rate are:
- a patent,
- a utility-model protection right (a utility model may cover, for example, new furniture functions or a technical method of making it)
- a registered industrial-design right (a design may cover a different shape or colour of furniture, for example)
- a registered integrated-circuit topography right
- a supplementary protection right for a patent for a medicinal product or plant-protection product (obtaining a patent takes a long time, so an additional right extends protection for medicines or active molecules)
- a registration right for an authorised medicinal or veterinary medicinal product (a drug patent covers the active molecule; registration protects the marketed product made up of the active molecule and auxiliary substances)
- the exclusive right referred to in the Act of 26 June 2003 on the Legal Protection of Plant Varieties (Journal of Laws 2018, item 432),
- copyright in a computer program
It is important that these rights be created, developed or improved as part of the entrepreneur’s R&D activity.
Axiom 2
Determining the proportion
The preferential tax rate can be applied to so-called qualifying income. This is total income from qualifying intellectual property rights multiplied by the so-called Nexus ratio.
The ratio is calculated using the following formula:
The letters stand for costs actually incurred by the entrepreneur for:
a– R&D activity conducted directly by the taxpayer in connection with the right;
b– acquiring R&D results connected with the right from unrelated entities;
c– acquiring R&D results connected with the right from related entities; and
d– the taxpayer’s acquisition of the qualifying intellectual property right.
Axiom 3
Type of agreement
The 5% rate may be applied to income from:
- licence agreements,
- sales,
- sales of products or services whose price (remuneration) includes the price of the right,
- and compensation for infringement of the above rights.
Axiom 4
Separate accounting
The law specifies how accounting must be kept to use the preferential rate. In particular, each right must be separated in the books, and suitable records must allow income and costs to be attributed to the right (or group of rights). The records must make it possible to establish income (or loss) from each right.
From when?
In 2020, entrepreneurs will be able to use IP Box relief for the first time to settle income earned in 2019.
How do you use the lower tax rate?
A taxpayer may use IP Box after the tax year ends, in the annual return. During the tax year, taxpayers pay advances at the general rate (9% or 19% for CIT taxpayers; 17%/32% on the progressive scale or 19% for PIT taxpayers).
A taxpayer who meets the IP Box conditions declares the amount of income from qualifying IP, separated from total income earned during the tax year, in the annual return. The taxpayer then applies the 5% rate instead of the general rate to qualifying income from qualifying IP.
Purpose
IP Box was designed to:
- increase employment in private-sector R&D,
- stimulate R&D investment by companies that used EU funds to develop their own R&D units,
- increase the number of patent applications and patents granted by the Polish Patent Office and the number of European and international patents obtained by Polish entities,
- increase businesses’ awareness of IP rights as potential sources of income.
IP Box is part of a pro-development policy in many countries that see innovation as an engine of the economy. It also responds to entrepreneurs’ requests made during work on the government’s White Paper on Innovation. IP Box schemes have been introduced in Israel, the Netherlands, the United Kingdom, Ireland and Luxembourg, among others.
Both R&D relief and IP Box require the taxpayer to conduct research and development. This does not automatically mean that only research centres can use them. R&D includes activities aimed at gaining new knowledge, developing new products, processes or services, or making improvements. A large international corporation and a small start-up can both conduct it. The important thing is that the work concerns an innovative, new product, process or service.
IP Box and R&D relief complement each other. IP Box applies a preferential tax rate to income from commercialising intellectual property rights created, developed or improved through the entrepreneur’s R&D. R&D relief, in turn, reduces the tax base for conducting R&D.
If this article interested you, explore our IP BOX offer and read how we can help:
Our specialists can help you put this knowledge into practice.
Summary
An entrepreneur planning to use IP Box must keep accounting records that allow revenue, tax-deductible costs and income to be established and R&D costs attributable to a specific intellectual property right to be separated. A project-based approach to costs is the main difference between R&D relief and IP Box. The latter requires detailed accounting records showing the link between qualifying income and expenditure incurred to obtain a qualifying intellectual property right.
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