The IP BOX is a tax preference in force since 1 January 2019. Who can take advantage of it and when? What specific benefits does it offer? Mateusz Kozieł, Attorney-at-Law, who has helped several dozen clients to get it, has the answers.
What is the IP BOX and its purpose?
The IP BOX is a solution that allows taxpayers who achieve revenue on account of eligible intellectual property rights to pay lower taxes. The relief has the form of a lower income tax rate for taxpayers who carry out innovative operations, such as entities that develop new software.
The preference tax rate is only 5%, which is much lower than the standard rates for the PIT (17% or 32% under the regular tax brackets system or 19% in the case of flat tax) and the CIT (9% or 19%).
The main purpose of this tax preference is to stimulate the market of innovative solutions—this is why the IP BOX is addressed to those entities whose work is of creative nature. In the PIT Law and the CIT Law, the Polish legislator has defined the activity that may be a basis for the application of the tax preference: “creative activities include scientific research . . . as well as development works, provided that they are carried out in a systematic manner in order to expand knowledge and use it to develop new applications.”
The IP BOX is available not only to scientists, biotechnology experts engaging in experimental and theoretical activities, or entities specializing in research—this tax preference is intended for everyone that uses knowledge to improve existing products or services, including software developers (authors of computer programs) and many other persons improving or developing new solutions that expand and build knowledge in general.
How to take advantage of it?
However, getting this tax preference is not simple and securing the entire process is crucial for the success of the application for the reduced tax rate.
It is not enough to be an eligible entity that has acquired the eligible rights that may be a basis for preferential treatment. It is also necessary to properly document both the process of developing the particular rights and their subsequent sale, licensing, or other form of distribution. This requires assistance from specialists who will help in collecting the necessary documents.
Statutory regulations provide for a closed catalog of eligible IP rights. These include:
- patents,
- protection rights concerning utility models,
- rights under a registration of an industrial design,
- additional protection rights concerning a patent for a medicinal product or a plant protection product,
- rights under a registration of a medicinal product or a veterinary medicinal product approved for placing on the market and the exclusive right referred to in the Polish Law on the Legal Protection of Plant Varieties,
- rights under a registration of an integrated circuit layout,
- copyrights concerning computer programs,
- rights that are legally protected under separate statutory regulations or international agreements ratified by Poland and other international agreements the EU is a party to, the object of which has been produced, developed, or improved by the taxpayer as part of his R&D activities.
You also need to remember that the IP BOX tax preference applies only to the income generated on eligible IP.
According to Mateusz Kozieł, Attorney-at-Law,
“From the point of view of the IP BOX, the crucial element is not only the sole fact of having acquired the eligible rights as part of the applicant’s operations, but also proper documentation of this process (and the related expenses). Equally important is the product commercialization stage—the revenues achieved in connection with the eligible rights have to be recorded in a manner allowing for calculating the amount subject to preferential tax treatment. Keeping separate records in this respect is a formal prerequisite for enjoying the IP BOX. These records have to be maintained in a manner that is clear for both the taxpayer and the Tax Office.”
“A taxpayer using the IP BOX tax preference not only has to secure the relevant internal documents, but also needs to regulate the principles of commercialization of his products. The provisions of the taxpayer’s agreements with his business partners are the fundamental piece of the puzzle called the IP BOX—the lack of the relevant contractual stipulations concerning the commercialization of the eligible rights or the financial settlements may result in the tax preference being unavailable.”
When is the IP BOX an option?
The IP BOX applies to the annual tax declaration in which the eligible revenues have to be specified—so far, it was not possible to use the 5% tax rate when calculating the monthly advances towards the tax. In an effort to combat the difficulties caused by the pandemics, the legislator has decided to allow the application of the 5% tax rate already when calculating the advances towards the tax. This means that the taxpayer’s funds are not frozen in the form of the advances that were paid at the 19% tax rate (and only at the end of the year, when the 5% tax rate could be applied, proportionally returned to him)—now, the 5% tax rate can be applied straight away every month.
What remains is the issue of what the taxpayer should do to safeguard himself when filing an annual tax declaration based on the preferential tax rate or wen paying reduced advances towards the tax. These doubts are cleared by Mateusz Kozieł, Attorney-at-Law:
“A taxpayer cannot limit himself to filing the annual tax declaration and keeping records with respect to eligible revenues. Even meticulous records maintained for the purpose of calculating the revenues eligible for preferential tax treatment are not a guarantee of tax security. It is extremely helpful to include, in agreements with business partners, mechanisms concerning the settlement of the remuneration, and so is obtaining an individual tax ruling with respect to the IP BOX.”
“This is why, even before filing the annual tax declaration, it is a good idea to apply for an individual tax ruling confirming that the revenue you are planning to cover with the IP Box is actually eligible. The sole fact of having filed an application and waiting for the tax ruling is a strong argument in dealing with the Tax Office if the 5% tax raises doubts on the part of tax authorities. The annual tax declaration, supported with extensive records concerning the eligible revenues and with a tax ruling, are a guarantee that tax authorities should not take any negative actions with respect to the taxpayer on account of the application of the 5% tax rate.”
When it was introduced
The IP BOX has been available since 1 January 2019. It may also be used in the form of an adjustment of the 2019 tax declaration; however, this requires a verification of the taxpayer’s existing documents. So far, thousands of entities have taken advantage of the IP BOX. If you would like to pay smaller taxes on your activity, contact our specialist:
Mateusz Kozieł, Attorney-at-Law – mateusz.koziel@kwkr.pl; phone: 0048 515 179 462