On 24 August 2018 the Ministry of Finance published a project of a bill amending the Personal Income Tax Act, the Corporate Income Tax Act, the Tax Ordinance Act and several other regulations (hereinafter: “the Project”).
The Innovation Box is going to be introduced into the Personal Income Tax (hereinafter: “PIT”) Act and the Corporate Income Tax (hereinafter: “CIT”) Act as a preferential form of taxation for entrepreneurs deriving income from commercialization of intellectual property rights.
IP Box has been implemented in other countries, e.g. the Netherlands, the United Kingdom, Ireland, and Luxembourg. The mechanism applied in those countries rely on taxation of income from intellectual property rights with reduced tax rate (e.g. in the United Kingdom – 10 percent), or exemption of part of the income from taxation (e.g. 80 percent in Luxembourg).
Regulations regarding preferential taxation of intellectual property rights should be in line with the OECD guidelines under the Base Erosion and Profit Shifting (BEPS) initiative contained in the report on Action No. 5.
The main purpose of this tax incentive is to increase the attractiveness of conducting R&D activities in Poland by Polish and foreign enterprises. In the long term it should trigger development of a knowledge-based economy.
The preferential rate – 5 percent of the tax base – will apply to income from qualified intellectual property rights created, developed or improved by a taxpayer as part of his R&D activities:
The aforementioned rights must be subject to legal protection under the provisions of separate acts or ratified international agreements Poland is a party to or other international agreements to which the European Union is a party. The Project also allows appropriate application of its provisions on eligible intellectual property rights to the expectative of obtaining these rights under condition that a taxpayer has submitted application to a competent authority. The catalogue of qualified intellectual property rights is exhaustive.
The Project concerns those intellectual property rights that are created, developed or improved by a taxpayer within R&D activities. The Project justification indicates, however, that the application of the relief shall be admissible if the taxpayer is the owner, co-owner, user or shall have the right to use the above-mentioned intellectual property rights. According to the Project justification, it will also be possible to benefit from the Innovation Box relief if the taxpayer purchases the above-mentioned qualified intellectual property rights, provided that the taxpayer then incurs costs related to the development or improvement of the acquired right.
The tax rate on the qualified income obtained by a taxpayer from the intellectual property rights discussed above will amount to 5 percent of the tax base. In accordance with the planned amendments, the tax base will be calculated as the sum of income from qualified intellectual property rights in a given tax year
The income/loss from the qualified intellectual property rights will include the income/loss from:
The final amount of income from the qualified intellectual property right will be determined using the appropriate formula included in the Project. This formulawill reward taxpayers who themselves or with the help of unrelated entities develop a given solution.
If it is not possible to determine the income per individual qualified intellectual property right, the taxpayer will be entitled to calculate the income for the same type of product or service, or for the same group of products or services in which the qualified intellectual property right has been used.
Losses from qualified intellectual property rights incurred in a given tax year will reduce income from the same qualified intellectual property right or the same type of product or service or the same group of products or services in which the intellectual property right has been used, in 5 consecutive tax years.
The taxpayers benefitting from the Innovation Box shall be obliged to report the income (loss) in the tax return in which the income was obtained.
A taxpayer who is going to take advantage of the proposed preferences will be obliged to keep detailed accounting records in a way that allows calculation of the tax base, including the link of incurred R&D costs with the income from intellectual property rights.
It should be underlined that the application of IP Box (lower tax rate for qualified income) will be taxpayer's entitlement, not taxpayer's obligation. It is crucial because applying the relief involves additional obligations, in particular to keep records allowing monitoring and tracking the effects of research and development works. If, based on the accounting records kept by a taxpayer, it would not be possible to determine the income (loss) from qualified intellectual property rights, the taxpayer will be obliged to pay the tax based on general rules.
The taxpayer shall be entitled to apply the tax relief throughout the duration of the legal protection of eligible intellectual property rights. For assets that are subject to notification procedure/ registration (the expectative of obtaining a qualified intellectual property right), a taxpayer shall be entitled to benefit from tax preference from the moment of filing or submitting an application for registration (however, there will be an obligation to return the amount of relief in case of withdrawal of the application, refusal of registration or rejection of the application).
In conclusion, according to the proposed Project, taxpayers who have the appropriate title to use qualified intellectual property rights are going to be entitled to Innovation Box relief. The preferential tax rate shall amount to 5 percent of the tax base.
It should be borne in mind that the Project will be subject to public consultations and further legislation process, so the final provisions of the Act could differ from the Project in current wording.
Please contact us if you would like to obtain more information on the described regulation or discuss its potential impact for you or your firm.