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5% CIT in Poland thanks to IP BOX/Innovation Box

In the recent days we have learnt about draft legislation amendment to the CIT/PIT law introducing a preferential 5% tax rate applying to qualified income from qualifying intellectual property rights.

The pool of qualifying intellectual property rights includes (protectable): (i) right to an invention (patent); (ii) additional protection rights for invention; (iii) protection right for utility model; (iv) right from registration of industrial designs; (v) right from registration of topographies of integrated circuits; (vi) patent for medical product or plant protection product; (vii) right from registration of medical products or authorized veterinary products; (viii) right from registration of varieties of plants and animal breeds; (ix) protected right to software.

What is important is the fact that these rights must be created, developed or improved by a taxpayer as part of their R&D activity.

The amount of qualified income corresponds to the amount calculated as the income obtained from the qualifying IP right multiplied by the nexus ratio. The nexus ratio has been implemented following the recommendations of BEPS Action 5, and will be reckoned as follows:

Individual letters in this formula stand for costs actually incurred in respect of

a) R&D activity carried out in connection with a qualifying IP right;

b) acquisition of R&D results from an unrelated entity;

c) acquisition of R&D results from a related entity;

d) acquisition of a qualifying IP right.

These costs do not include the costs not directly related to qualifying IP rights, including interest, financial fees, real property related costs. If the value of the ratio calculated in accordance with the above formula is greater than 1, it is assumed to be 1.

The draft legislation also indicates that that the following kinds of income (loss) are income from qualifying IP rights:

  • income (loss) from fees / royalties under license agreement for a qualifying IP right;
  • income (loss) from sale of a qualifying IP right;
  • income (loss) from the qualified IP right embedded in the sale price of products or services;
  • income (loss) from compensation (related to a qualifying IP right).

Income “embedded” in the sale price of a product will be reckoned on the basis of a market price (pursuant to the transfer pricing provisions). Importantly, it will be possible to determine the income at the level of the entire product / service, or their group (instead of individual / single rights).

The provisions may also be applied to an expectancy of obtaining a qualified intellectual property right—if, however, it is not possible to obtain a right of protection, it will be necessary to make a correction in the declaration for the year in which such a circumstance occurred.

As regards administrative issues, taxpayers will be required to keep records in order to separate qualifying intellectual property rights (corresponding to R&D tax relief). These records should contain the following separate items: income, deductible expenses, income/loss divided into each qualified intellectual property right. If there will be more than one qualified intellectual property right, it will be possible to keep their records together with the possibility of determining the total income. Yet, if the records do not allow to determine the income/loss, then income derived from IP will be taxed at the standard rate.

And now let’s put it in practice. If a taxpayer incurred qualified costs standing at PLN 1,000,000, made an acquisition for PLN 100,000, and purchased R&D results from a related entity for 400,000, so the nexus ratio is as follows: (1,000 @ 1.3 / (1,000 +100 + 400) = 86.7%. Thus, 86.7% of profits from a qualifying IP right will be taxed at a preferential 5% rate of CIT.

According to the proposed timeline, the new relief is set to enter into force in the beginning of 2019. And the transitional provisions will let taxpayers use the IP BOX in respect of costs already incurred, but not before 31 December 2012.

To prepare oneself to utilize this preference, taxpayers should in the first place develop an internal management strategy for innovation and IP rights. It will also be important to determine the income from qualified income (using transfer pricing techniques) and to keep appropriate records.

Undoubtedly, this is a very good change. It aims at increasing the attractiveness of conducting research and development activities in Poland by domestic and foreign enterprises. Some issues, however, require further clarification (one of such issues being the moment of incurring costs—please note that in BEPS Action 5 the costs can be included in the calculation formula already at the time of expenditure, regardless of the accounting and tax qualification, as a one-off cost or cost over time).

Ewelina Stamblewska-Urbaniak
partner at Crido

Ewelina Stamblewska-Urbaniak

Tax Advisory Services

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