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TAX ALERT –IP Box relief (January 2019)

TAX ALERT –IP Box relief (January 2019)

New regulations
On 1 January 2019, a new PIT and CIT relief, known as IP Box, came into force. The essence of the relief is to make it possible for entrepreneurs to apply a reduced 5% tax rate to a given income category. It is about the income received from intellectual property rights, in the case when the taxpayer incurred expenses for the acquisition of these rights or for their generation and improvement as part of his or her research and development activity (hereinafter referred to as R&D activities). The provisions regulating the new relief can be found in art. 30ca, 30cb and 5a point 38 of the Personal Income Tax Act and art. 24d, 24e and 4a point 26 of the Corporate Income Tax Act.

Intellectual property rights
The legislator explained that the IP Box relief applies only to income received from a specific category of rights, named qualified intellectual property rights (hereinafter referred to as qualified rights). The list of these rights is exhaustive. It includes, in particular, patents, protective rights for the utility model, rights from the registration of an industrial design and copyright to computer programs. The qualified rights subject to relief are those which: 
- are protected on the basis of separate regulations (e.g.  Act on protection of industrial property rights, the Copyright Act and international agreements regulating the protection of such rights).

This means that - if other requirements are met - the preferential 5% rate is valid for the whole period in which the qualified right is protected under the law;
-
 that have been produced, developed or improved as part of the research and development activities carried out by the taxpayer.

The relief is therefore applied to the qualified rights created by the taxpayer as part of their own R&D activities, as well as to rights acquired from third parties, when the acquired rights are subsequently developed or improved by the taxpayer as part of such work: 
- when the taxpayer is the owner, co-owner, user of these rights or uses them on the basis of the license obtained.

Expectation of protection
A 5% tax rate can be also applied to income received in the period from the date of notifying or submitting an application for protection of qualified rights until the date starting from which these rights are protected. If the right concerned is not ultimately protected (e.g. as a result of rejection of the application), then the income from the qualified rights is taxed on general terms, which means that the difference between the preferential tax paid and the tax calculated on general terms must be paid back to the tax authority.

Income from qualified rights
The regulations indicate that the relief applies to the income from the so-called commercialization of qualified rights. Income types have been listed exhaustively in the tax act. These include income from:
- fees and charges collected under license agreements granted to thirds parties,
- sales of these rights,
- damages for breach of these rights,
- sales of products and services produced using these rights.

Relationship between income and costs 
What transpires from the essence of the IP Box relief, is that there should be a relationship between the above-mentioned income from qualified rights and the costs of creating, improving and acquiring these rights. This is based on the so-called  nexus approach. This means that the tax at the rate of 5% is calculated from the tax base (hereinafter referred to as qualified income), which is calculated according to the formula indicated in the Act. What is taken into account in the aforementioned formula are the costs actually incurred by the taxpayer and relating to:
- R&D activities carried out by the taxpayer in the scope related to the creation, development and improvement of qualified rights,
- acquisition of the results of R&D activities related to qualified rights from third parties, which are then developed or improved by the taxpayer. 
Expenses which are not directly related to qualified rights (e.g. interest, real property expenses) are excluded from the above costs. The applied construction assumes that the higher expenses the taxpayer incurs for his or her own R&D activities or for the acquisition of qualified rights from unrelated entities, the higher the value of qualified income which will be subject to taxation at the rate of 5%. The reduction of the amount covered by the preference is influenced by the costs of acquiring qualified rights from related entities. New regulations also allow taxpayers to  include the costs of R&D activities or of the acquisition of qualified rights incurred in the period preceding the introduction of the IP Box relief, i.e. from January 2013 until December 2018, if they have been properly documented.

R&D activities 
The tax acts include a definition of research and development activity. Generally, R&D is research and development, the result of which can be used to produce new products and services, and works that result in the introduction of new ways to produce products and provide services, and in the modernization of the existing ones. Due to the complexity of development work actually carried out by entrepreneurs and the generality of definitions, there is a risk of interpretation disputes with tax authorities in this respect.



Andrzej Dudkowiak

Lawyer

Andrzej Dudkowiak

Barrister, Senior Partner

Andrzej Dudkowiak

Contact:

Rondo ONZ 1
00-124 Warsaw