On August 24, 2018, the Polish Ministry of Finance published a draft act amending the act on personal income tax, the act on corporate income tax. One of the proposed changes was the introduction of preferential taxation of income from intellectual property rights (the so-called “IP Box” or “Innovation Box” relief).
Innovation Box – IP Box allowances – were introduced to the Polish Personal Income Tax Act (“PIT”) and to the corporate income tax (“CIT”) as a preferential form of taxation (preferential taxation of earned income) for entrepreneurs obtaining income from commercialization of intellectual property rights. Qualified intellectual property rights are obtained after submitting an application to the appropriate body – then it is possible to take advantage of this relief.
IP Box has been implemented in other countries, including: the Netherlands, Great Britain, Ireland, Luxembourg.
The mechanism used in these countries consists in taxing income from intellectual property rights with a reduced tax rate (e.g. in Great Britain – 10%) or exempting part of tax revenues (e.g. 80% in Luxembourg). IP Box Relief is available to increase one’s company’s knowledge resources or to protect intellectual property. It can also be used by those who want to register an industrial design as part of research and development.
Regulations on preferential taxation of intellectual property rights should be consistent with the OECD guidelines under the Base Erosion and Profit Shifting (BEPS) initiative.
The subject of taxation covered by the IP Box
The preferential rate of income tax – 5% of the tax base – will be applicable to income from qualifying intellectual property rights created, developed or improved by the taxpayer as part of its R&D activities. The basis for granting the IP Box tax relief is the fulfillment of several conditions. More precisely, it is possible in the case of using knowledge resources and research and development works related to: rights to an invention (patents), additional protection rights for an invention, utility model rights, rights from registration of an industrial design, rights from registration of integrated circuit topography, additional protection rights for a patent for a medicinal product or plant protection product, legal protection of plant varieties, creating new applications, rights from registration of a medicinal or veterinary product, rights from registration of new plant varieties and animal breeds, rights to a computer program.
The above rights must be legally protected on the basis of the provisions of separate acts or ratified international agreements to which Poland is a party or other international agreements to which the European Union is a party. The draft also allows for the appropriate application of its provisions on qualified intellectual property rights to persons waiting for these rights (additional protection right), provided that the taxpayer submits an application to the competent authority.
The IP Box relief applies to those intellectual property rights that are created, developed or improved by the taxpayer as part of R&D activities. It is indicated that the application of the relief is permissible if the taxpayer is the owner, co-owner, user or has the right to use the above-mentioned intellectual property rights. The Innovation Box tax relief may also be used in the event that the taxpayer acquires the results of research and development, provided that he then incurs costs related to the development or improvement of the acquired right.
The tax rate on qualified income earned by the taxpayer from the intellectual property rights discussed above will be 5% of the tax base. Accordingly, the tax base will be calculated as the sum of revenues from qualifying intellectual property rights in a given tax year.
Income / loss on qualifying intellectual property rights includes income / loss from: fees or commissions resulting from a license for a qualified intellectual property right, sale of qualifying intellectual property rights, qualifying intellectual property rights included in the selling price of products or services, compensation for infringement of qualifying intellectual property rights, if obtained in court proceedings, including arbitration proceedings.
Losses on qualifying intellectual property rights incurred in a given tax year will reduce income from the same qualifying 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 for 5 consecutive tax years.
The taxpayer has the right to benefit from the tax relief for the entire period of legal protection of the entitled intellectual property rights. In the case of property components subject to the application / registration procedure (waiting to obtain a qualified intellectual property right), the taxpayer has the right to benefit from tax preferences from the moment of submitting the application for registration (however, the taxpayer will be obliged to refund the amount in the event of withdrawal of the application, refusal of registration or rejection of the application).
The Polish IP Box tax relief is available from January 1, 2019. This is a preferential CIT / PIT rate of 5% on the taxpayer’s income from commercialization of qualifying intellectual property rights. In order to use the IP Box, 4 basic criteria must be met:
a) to conduct research and development activities;
b) to cover the results of R&D activities with legal protection in accordance with the list of authorized intellectual property rights. Qualified intellectual property rights are, inter alia, patents, utility models, industrial designs, the right to register an integrated circuit design, an additional protection certificate for a patent for a medicinal product or plant protection product, copyrights to computer programs;
c) to identify the costs of R&D activities carried out, which led to the entrepreneur obtaining a qualified intellectual property right (the key is to keep detailed accounting records);
d) to identify the commercialization of qualifying intellectual property rights, e.g. by selling or levying royalties on qualifying intellectual property rights.
The IP Box relief and R&D complement each other. The first one includes a preferential tax rate on income from the commercialization of intellectual property rights. They have to be created, developed or improved through the research and development activities carried out by the enterprise. R&D tax relief reduces the tax base for conducting R&D activity.
The IP Box tax relief consists in taxing at the preferential tax rate only income obtained from qualifying intellectual property rights that have been produced, developed or improved by the taxpayer as part of his research and development activities. Therefore, one cannot claim the IP Box tax credit without doing R&D.