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R&D tax relief and IP Box tax relief – 25 facts and myths

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The R&D tax relief and IP Box tax relief are increasingly popular among taxpayers. No wonder – they offer attractive tax advantages. The R&D tax relief has been around since 2016, and IP Box since 2019. Over the years, numerous facts and myths have sprung up around these tax incentives. Today we present some of the most popular, confirming facts and debunking myths!

1. R&D tax relief can be claimed for previous tax years – FACT

An enterprise which incurred R&D expenses in previous years may claim the R&D tax relief, provided that the statutory requirements are met – notably that the expenses qualify as eligible costs. In order to claim R&D tax relief for previous years, you need to submit amendments of the tax returns for those years, accounting for the amended eligible costs in CIT/BR or PIT/BR forms, as appropriate.

2. In order to qualify for R&D tax relief you need to have a dedicated R&D Department –  MYTH 

The legislator did not make eligibility for R&D tax relief conditional on the taxpayer having a department dedicated to this type of activity, e.g. an R&D Department. Likewise, the definition of R&D activity does not suggest it is necessary to run a separate department involved in such activity. Hence, the operation of an R&D Department as a necessary prerequisite for claiming R&D tax relief should be regarded as a myth.

3. In order to qualify for R&D tax relief you need to keep separate accounting records – FACT

The obligation to keep separate accounting records by taxpayers intending to claim R&D tax relief has been regulated in article 24a (1b) of the Personal Income Tax Act and article 9 (1b) of the Corporate Income Tax Act. These accounting records should disclose the costs of research and development activities separated out of tax-deductible expenses.

4. In order to qualify for R&D tax relief you need to obtain an individual tax ruling – MYTH 

Obtaining a positive tax ruling in an individual taxpayer case extends legal protection to that taxpayer under Tax Ordinance Act in the event of potential disputes with tax authorities. However, having a tax ruling is not a necessary prerequisite for claiming R&D tax relief. It is a good idea to obtain a tax ruling, so that it can serve as an instrument of protection in the event of a dispute with tax authorities, but it is not necessary to qualify for R&D tax relief.

5. In order to qualify for IP Box tax relief you need to engage in R&D activity – FACT

The IP Box tax relief provides for a 5% tax rate on income obtained from eligible intellectual property rights which have been created, developed or improved by the taxpayer within the framework of their research and development activities. Accordingly, it is impossible to claim IP Box tax relief without conducting R&D activities.

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R&D tax relief is only available to entities running a laboratory – MYTH 

R&D tax relief can be claimed by taxpayers involved in research and development activities. Importantly, to conduct research and development activities it is not necessary to run a laboratory. According to the statutory definition, the term R&D activity covers creative activity including scientific research or development works, carried out in a systematic manner aimed at expanding the body of knowledge or utilizing the body of knowledge for the purposes of new applications. These, in turn, do not in any way imply the necessity of running a laboratory.

You need to evidence your right to claim IP Box and R&D tax relief in your annual tax return – FACT

Both the tax deductions of eligible expenses under R&D tax relief and the application of the preferential tax rate within the framework of the IP Box tax relief are subject to disclosure in the tax return for the tax year during which the taxpayer intends to claim the tax relief. Therefore, in principle, you cannot claim the relief in the course of the tax year, save in specific circumstances.

IP Box tax relief can be claimed regardless of the source of revenues – MYTH 

The preferential tax rate under the IP Box tax relief scheme can be claimed by taxpayers only with respect to earnings from eligible intellectual property rights, including e.g.: copyright in computer software, patent, utility model.

R&D tax relief can be claimed in the course of the year – FACT

Special provisions have been made for claiming R&D tax relief by the taxpayers who in 2020 conduct (or conducted) activities related to combating COVID-19. Eligible expenses on research and development activities dedicated to developing products necessary to combat COVID-19 can be deducted by taxpayers from the tax base already when making advance payments towards income tax in the course of the year.

IP Box tax relief is not available to taxpayers who are sole proprietors – MYTH 

IP Box tax relief is available to legal persons as well as individuals. A natural person can claim the incentive as long as they conduct non-agricultural business activity. Therefore, taxpayers who are sole proprietors are eligible for IP Box tax relief.

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IP Box tax relief can be claimed in the course of the year – FACT

Just like in the case of R&D tax relief, special provisions have been introduced, enabling taxpayers to apply the preferential 5% tax rate under IP Box relief already when calculating the amount of advance payment towards income tax on earnings generated from eligible intellectual property rights which have been or will be used to combat COVID-19 (applicable in 2020).

R&D tax relief can be applied to any expense – MYTH 

R&D tax relief can be applied only to those expenses which meet the eligibility criteria (the so-called eligible costs). These include, for instance: spending on the remuneration of employees involved in R&D activity, spending on purchases of materials and supplies used in R&D activity, costs of obtaining and maintaining a patent.

R&D tax relief can also be claimed if you have a tax loss – FACT

With regard to R&D tax relief, if the taxpayer incurred a loss or their income is lower than the applicable deductions, deductions can be claimed in the tax returns over six consecutive tax years following the year in which the taxpayer was eligible for the relief.

In order to qualify for R&D tax relief you need to have the status of a Research & Development Centre – MYTH 

Conducting research and development activities is one of the prerequisites for claiming R&D tax relief, but it is not conditional on having the status of a Research & Development Centre. On the other hand, having such a status comes with a broader catalogue of eligible costs.

Apart from the costs applicable to ordinary enterprises, under the R&D tax relief scheme Research & Development Centres can additionally deduct e.g. expenses related to depreciation of buildings, structures and premises constituting separate real estate. Therefore, having the status of an R&D Centre offers greater advantages within the framework of R&D tax relief, but it is not indispensable to qualify for it.

You cannot claim IP Box and R&D tax relief on the same item of income – FACT

The legislator has ruled out the simultaneous application of both innovation-oriented tax incentives to the same income. The deduction of eligible expenses under R&D tax relief is not included in the calculation of the tax base subject to taxation at 5% tax rate under IP Box tax relief. Nevertheless, it is possible to apply both incentives in the same tax year alternately, with respect to “different” items of income.

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You need to notify the tax office prior to claiming IP Box and R&D tax relief – MYTH

The legislator does not in any way make the right to claim IP Box and R&D tax relief conditional on prior notification of the tax office. The only requirements which must be met to qualify for these incentives refer to the taxpayer’s business activity and fulfilment of certain duties necessary to claim the incentives (including evidencing the right to claim relief in the annual tax return).

When claiming IP Box tax relief, the costs related to eligible intellectual property rights must not include interest or financial charges – FACT

Pursuant to article 30ca (5) of the Personal Income Tax Act and article 24d (5) of the Corporate Income Tax Act, the costs actually incurred in relation to an eligible intellectual property right do not include costs which are not directly related to the eligible intellectual property right, including interest and financial charges.

You cannot claim R&D tax relief when receiving funding/subsidies –MYTH 

You can still claim R&D tax relief when receiving all kinds of funding for your research and development activities, but in such a case the eligible costs subject to deduction should be reduced to account for the amount of funding received. This is because pursuant to article 26e (5) of the Personal Income Tax Act and article 18d (5) of the Corporate Income Tax Act, eligible costs are subject to deduction as long as the taxpayer has not been reimbursed for them in any form. Hence, you can claim R&D tax relief even when you have received funding, but eligible costs will be reduced proportionately to the amount of financing received.

In order to qualify for R&D tax relief you need to conduct at least one type of activity: development or research – FACT

The definition of research and development activities provides for an alternative, indicating that you can be involved in only one of these activities. The term research and development activities can be applied to creative activity involving scientific research or development works, or both these types of activity at the same time.

To claim R&D tax relief your activities must be related to developing asolution not yet available in the market – MYTH 

The creative nature of research and development activities may manifest itself in developing new concepts, tools or solutions which were not part of the taxpayer’s business practice to date or which are sufficiently innovative to be significantly different from the solutions already in place in the taxpayer’s business. At the same time, these solutions do not have to be completely new to the market.

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Taxpayers who keep tax revenue and expense ledgers and wish to claim IP Box relief must keep separate records for the purposes of that incentive – FACT

The obligation to keep separate records for the purposes of claiming IP Box tax relief is based on article 30cb (2) of the Personal Income Tax Act. According to its provisions, the records should specify each eligible intellectual property right, with the relevant costs and revenues related thereto.

To qualify for R&D tax relief your R&D works must end in success – MYTH 

According to the statutory definition, research and development activity should be carried out in a systematic manner in order to expand the body of knowledge or utilize the body of knowledge for the purposes of new applications. Therefore, the legislator did not make eligibility for R&D tax relief conditional on a successful outcome of R&D works.

When claiming IP Box tax relief, you must recognise each eligible intellectual property right separately – FACT

The taxpayer intending to claim IP Box tax relief is obliged to recognise each eligible intellectual property right separately in their accounting records. This obligation is related to the necessity to calculate the amount of eligible income which will be subject to taxation at the preferential rate, based on the costs and revenues corresponding to the specific intellectual property right.

After you claim R&D or IP Box tax relief, the tax office always initiates a tax inspection – MYTH 

A tax inspection or verification activities are launched if it becomes necessary to clarify emerging doubts regarding the taxpayer’s tax settlements. Claiming R&D and IP Box tax relief will not always trigger such measures from the tax authorities. Within the framework of verification activities, tax offices may ask the taxpayer a series of questions related to the R&D/IP Box tax relief claimed or request to be provided with e.g. calculations underlying the figures disclosed in the tax return. If the taxpayer qualifies for the relief which has been duly applied, there will be no grounds for the tax office to challenge the relief claimed. That is why the prospect of a tax inspection or verification activities should not in itself discourage taxpayers from taking advantage of tax incentives.

You need to calculate the nexus ratio for each eligible intellectual property right – FACT

The nexus ratio is used to calculate the amount of eligible income from an eligible intellectual property right which can be subject to taxation at the preferential rate. The amount of income is determined by multiplying the income from the eligible intellectual property right generated in the tax year and the nexus ratio.

AUTHORS: Joanna Krajnik, Consultant, Michał Rodak, Tax Advisor, Tax advisory services