Changes in taxation of in-kind contributions: Tax incentives for innovators
A new package of tax incentives under the programme described in Poland’s “Innovation Whitepaper” went into force at the beginning of 2017. This legislative move is a bow to researchers and encourages further innovative projects.
Changes in the general rule on taxation of in-kind contributions
Changes introduced by the Act of 5 September 2016 Amending the Personal Income Tax Act and the Corporate Income Tax Act entered into force on 1 January 2017. One of the changes is a reduction in the CIT rate for small taxpayers.
The act also changed the rules for recognition of revenue for in-kind contributions to a company or cooperative in a form other than an enterprise or an organised part of an enterprise.
Previously, under both the PIT Act and the CIT Act, the shareholder’s revenue was the nominal value of the shares taken up in exchange for the in-kind contribution. But the situation where the nominal value of the shares differed greatly from their market value was problematic for taxpayers and tax authorities alike.
This issue was considered by the Supreme Administrative Court, which pointed out in the judgment of a seven-judge panel of 20 July 2015 (Case II FSK 1772/13) that the nominal value of shares is generally not subject to market mechanisms, and thus there is no rationale for the tax authorities to examine the market value of the par value of shares. Thus the tax authority is also not entitled to determine the market value of the shares taken up, even if it differs significantly from the nominal value of the shares.
Consequently, the parliament decided to change the rules for recognition of revenue on taking up of shares in exchange for an in-kind contribution. Under the new regulations, under 1 January 2017 the taxpayer’s tax revenue is the value of the in-kind contribution specified in the company’s statute or articles of association, or other comparable document. But if this value is lower than the market value of the in-kind contribution, or the value of the in-kind contribution is not specified in the statute, articles of association or comparable document, the shareholder’s revenue will be the market value of the in-kind contribution determined as of the date of transfer of ownership of the contribution.
Bonus for innovators—exclusion from taxation
Changes introduced by the Act of 4 November 2016 Amending Certain Acts Specifying the Conditions for Conducting Innovative Activity—popularly known as the “Small Innovation Act”—also entered into force at the beginning of 2017. One of the main changes under that act is introduction of a permanent exclusion from the catalogue of types of revenue (under both PIT and CIT) of in-kind contributions by a commercialising entity to a company in the form of commercialised intellectual property. This means that the value of such in-kind contribution specified in the statute, articles of association or comparable document will not constitute taxable revenue.
The definition of “commercialisation of intellectual property” is nearly identical in the PIT Act and the CIT Act, and includes:
- A patent, additional protective rights to an invention, or protective rights to a utility model, industrial design or an integrated circuit layout design, or the right to obtain such rights or a priority right, as defined in the Industrial Property Law
- Economic copyright to software
- The equivalent of documented knowledge or information usable in industrial, scientific or commercial activity (knowhow)
- The right to exploit the rights or values in items (a)–(c) under a licence agreement.
The commercialising entity under the PIT Act is the innovator holding the rights or values listed in items (a)–(c), including under a licence agreement referred to in item (d).
The issue is defined somewhat differently in the CIT Act. There the commercialising entity is one of the following:
- An institution of higher learning
- A company established under the Higher Education Law
- The Polish Academy of Sciences or one of its institutes
- A company established under the Polish Academy of Sciences Act
- A research institute
- A company established under the Research Institutes Act
- An innovator holding the rights or values in points (a)–(c), including under a licence agreement referred to in item (d)
- An international research institute established under separate regulations, operating in Poland.
The legislative intent is that the new exemption should not apply to PIT payers who took up shares in a company in exchange for an in-kind contribution in the form of commercialised intellectual property prior to 1 January 2017. For these taxpayers, the regulations in force on the date of taking up of the shares will apply.
The exemption also does not apply to CIT payers who took up shares in a company in exchange for an in-kind contribution in the form of commercialised intellectual property in a tax year beginning prior to 1 January 2017 (a tax year other than the calendar year). In that case as well, the rules in force until 31 December 2016 will apply.
Prospects for the future
The question arises whether the change described above providing for exemption from taxation of this type of revenue will help hasten the process of commercialisation of ideas. As of now it appears that thanks to such measures, the Polish economy is becoming a bit more friendly to the innovative community and for growth of cooperation between business and science. The selection of the method of commercialisation of knowledge still depends on numerous factors, but when adopting a strategy it is important to consider the tax aspects that can handicap a venture at the outset. We must also not forget about the plans to adopt a “Big Innovation Act,” which is intended to facilitate the work of innovators to a greater extent.
Mateusz Jopek, Maksymilian Olejniczak, Tax practice, Wardyński & Partners