Tax Supervisor at RSM Poland
Since a tax relief on research and development activity was introduced in 2016, relevant regulations have been amended on a yearly basis. We may have fond memories of the original regulation, as its legislator managed to use only 467 words. Currently, the R&D tax relief is provided for in more than 2,200 words in the CIT Act itself and in provisions of non-tax acts, which are going to be addressed here later.
We may find comfort in the fact that the amendments introduced over the years have been, as a rule of thumb, beneficial for taxpayers: they extended the catalogue of ‘eligible costs’ (e.g. as of 2017 by the costs of obtaining patents) and increased the deduction limits for these costs (e.g. for large enterprises, the percentage of depreciation cost deduction increased since 2016 from the level of 10% to 100%).
Modifications in the R&D tax relief were introduced as of the beginning of this year, as well. Interesting from the perspective of entities operating in the IT sector seem to be the changes taxpayers learned about only in the second half of the year, though. We are talking about provisions introduced in the Act of 20 July 2018 (Law on Higher Education and Science) and changes under the Act of 23 October 2018 amending the Personal Income Tax Act, the Corporate Income Tax Act and certain other acts.
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The first of these legal acts has modified the definitions of ‘research works’ and ‘development works’, crucial for the R&D tax relief. As of 1 October 2018, these concepts have no longer been explained autonomously in the provisions of the CIT and PIT Acts, but through a direct reference to the provisions of the Law on Higher Education and Science.
Please note in particular the new definition of ‘development works’. According to it, development works are activities that involve purchasing, combining, developing and using the expertise and skills currently available, among others – in the scope of IT tools or software – for planning production and developing changed, improved or new products, processes or services, excluding the activity of routine or periodical changes introduced to them, even if such changes are improvements by nature.
Thus, the amended definition clearly emphasises that it is being pursued by entities from the widely understood IT industry. That is because it states that development works pertain to the expertise and skills in the scope of IT tools or software. The regulations that have been in place earlier offered a general provision that development works pertain to expertise and skills from the field of science, technology and business activity along with other expertise and skills. It seems, however, that this change is not going to have any major impact on the identification of the effects of research and development activity in the IT industry. The analysis of earlier practice shows that the authorities would confirm that the R&D tax relief can be applied by entities operating in this sector.
Entrepreneurs from the IT industry have some other reasons to be happy, as well. It is because of the recently adopted Act of 23 October 2018 amending the Personal Income Tax Act, the Corporate Income Tax Act and certain other acts (you can read more about the changes introduced in this act here). This act has provided an explicit statement that revenues from rights created by the taxpayer shall not be included in the revenue from ‘capital gains’. Thus, if you are creating such rights on your own (e.g. when developing computer software), the revenues earned from it shall be classified by CIT taxpayers as income from other sources of revenue, and not capital gains.
How does it affect the R&D tax relief? Previously, taxpayers creating intangible assets on their own were not sure if the expenses incurred on this could be the basis for R&D tax relief calculation. Some tax authorities were of the opinion that revenues from the sale of software created on your own shall be recognised as revenue from capital gains. Thus, such costs were automatically excluded from the R&D tax relief, because Article 18d paragraph 1 of the CIT Act clearly sets forth that tax deductible costs incurred on research and development activity shall only be deducted from revenues other than revenue from capital gains. Even though the Ministry of Finance has recently presented a position favourable for taxpayers in this respect, the introduction of such provision directly in the act is going to boost entrepreneurs’ confidence. And this is another reason why it is worthwhile to consider implementing the R&D tax relief.
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