IP Box - tax credit for programmers
For the last couple of years (since 1 January 2019) self-employed entrepreneurs have had the opportunity to apply a tax credit allowing them to pay tax at the rate of only 5%.
IP Box? How does it work?
Let’s start from the beginning. A description of the above-mentioned solution can be found on the gov.pl website, under the Ministry of Development, Labor and Technology’s Programs and Projects tab, which says:
“IP Box is a preferential taxation method of income derived from the sale of products or services produced under intellectual property rights.”
But what exactly constitutes this preferential tax treatment?In the legal sense, it usually consists of all types of exemptions, reductions, waivers or deductions connected with tax collection. In practice, this means that for income derived from producing software, the taxpayer (in this particular case - a programmer or another individual who creates intellectual property rights products in the form of computer software protected under Art. 74 of the Act on Copyright and Related Rights) shall be obligated to pay tax at the rate of only 5% instead of the standard rate of 19% (if subject to flat-rate tax) or the 17-32% scale (if subject to taxation under general principles), provided specific conditions have been met.
The main goal is to entice entrepreneurs to conduct research and development activities resulting in intellectual property rights in order to promote knowledge-based economy. IP stands for intellectual property, and programmers who derive income from assignment of IP rights under a license, sale of IT services, or sale of the IP itself, may apply for such a tax credit.
Who may apply for the IP Box solution?
Following the information posted on the government website:
“Entrepreneurs who derive income from intellectual property rights (IP) attained from research & development activities (B+R) or B+R services purchased from other entities, but patented by themselves, will be able to apply a preferential CIT or PIT rate.” The general CIT rate amounts to 9/19% and PIT rate to 19% (flat-rate tax) or 17% and 32% (taxation under general principles in accordance with the tax scale). However:
“The necessary prerequisite for applying the IP Box solution consists in carrying out research & development activities directly linked to the creation, development, or improvement of qualified intellectual property rights.”
Qualified intellectual property rights include many items, such as patents or software copyrights. It is also worth noting that research & development activities are understood not only as great scientific research, but also improving and expanding on priorly developed items that constitute a new piece of computer software and are considered creative within the scope of the programmer’s work as well as the client’s for whom it is being developed. This mean that in the case of developing a new piece of software from the ground up or modifying a pre-existing one, we may be entitled to the above-mentioned tax credit. However, in each such case we have to determine whether the R&D work conducted by us is compliant with the pertinent laws and regulations (specific prerequisites have to be met) as well as whether the piece of software that we have developed constitutes a copyright-protected computer program.
So how can one apply for this kind of solution?
The tax credit can be applied when filing your annual tax return, e.g., for the year 2020 by the 30th of April 2021. Throughout the year, we are obligated to make advance tax payments depending on the chosen form of taxation in line with the 19% rate (flat-rate tax) or 17% and 32% (taxation under general principles) and we only declare the refundable tax amount through the annual return. The right to apply the IP Box solution can only be granted upon prior submission of an application for an individual tax ruling to the Head of the National Revenue Administration. Once the application has been processed favourably, it is important to remember that regular off-book records should be kept containing the descriptions of all developed intellectual property rights as well as the revenue, costs, and income attributable to each of those rights. Keeping off-book records is a mandatory requirement for applying the tax credit. If, throughout the year, you work on more than a single project that falls into the category of intellectual property, each such right should be individually specified in your records. Another prerequisite for receiving the tax credit consists in the incurrence related to the R&D activities carried out directly by the taxpayer and connected with the qualified intellectual property right. This means that the taxpayer is obligated to incur costs connected with their project - this may be a new laptop or its component - graphics card, new memory chip, mouse, keyboard, or speakers.
Should I apply?
When applying the IP Box tax credit, it is very important to strictly follow the rules stipulated in the pertinent tax regulations, as it is a deviation from the taxation principle and requires that the taxpayers who wish to apply the preferential tax treatment fulfill specific requirements. If, during a tax inspection, the authorities determine that certain conditions have not been met, they may deny your request to apply the 5% rate. In such a case, you will be obligated to pay the outstanding tax amount with interest. When significant amounts derived from the sale/licensing of the produced software come into play, it is definitely worth it to try and fulfill all the prerequisites for applying the IP Box solution, as the funds saved this way may be reinvested to further develop our business. Should you have any questions or if you would simply like to learn more about the IP Box solution, please do not hesitate to contact us!