Tax support for innovation
In addition to direct public funding for innovative activity, e.g. grants and subsidised loans, tax instruments are also a major element of support for innovation.
Tax credit for new technologies
One of the principal tax instruments supporting innovation in Poland is the tax credit for new technologies, which entitles the taxpayer to deduct from their taxes up to 50% of expenditures on acquisition of new technologies.
For purposes of the technology incentive, new technologies are defined as intangibles, and more specifically the results of research and development, including such items as copyrights, licences, rights under the Industrial Property Law, and know-how which are acquired and can be used commercially as of the time they are acquired, with an anticipated period of use longer than one year, and used by the taxpayer for purposes connected with the commercial activity conducted by the taxpayer or provided for use on the basis of a licence or sub-licence agreement, traditional lease, financing lease, or tenancy. The costs of R&D completed with a positive result which may be used for purposes of the taxpayer’s commercial activity also constitute intangibles for this purpose if they meet certain conditions (as discussed in more detail below). In practice, this incentive is most often applied to software, although this does not exclude its application to other types of intellectual property as well.
Except for the taxpayer’s own R&D, new technology should be acquired on the basis of an “agreement on transfer and use of rights.” As this type of agreement is not defined in the tax regulations, it appears that the acquisition of new technology should be interpreted broadly to include not only purchase, but also an agreement disposing of rights to use intellectual property or a leasing agreement. Intangibles acquired by operation of law should also qualify for the technology incentive if they meet the other conditions. This could involve more specifically intangibles transferred for a fee to a business as a result of cooperation undertaken with the inventor, e.g. an R&D unit.
A new technology for this purpose must be innovative, that is, it must enable the production of new or improved goods or services and not have been used anywhere in the world for longer than the previous 5 years. The innovativeness of the new technology must be confirmed by the opinion of a research unit independent from the taxpayer within the meaning of the Act on Rules for Financing of Science.
Upon fulfilment of these conditions, the taxpayer is entitled to claim a tax credit for up to 50% of the expenditures on acquisition of the new technology included in its initial tax basis. The incentive thus covers not only expenditures on the purchase of the new technology, but also other expenditures so long as they are included in the initial tax basis of the intangible. Expenditures on the acquisition of fixed assets or other equipment cannot be included in the basis for the incentive, however, unless they were essential to exploit the technology.
The credit is taken in the return for the tax year in which the expenditures were incurred to acquire the new technology, i.e. the year when the new technology was entered in the taxpayer’s records of fixed assets and intangibles (including also expenditures incurred in the preceding year). If the taxpayer generated a tax loss for that year or the taxpayer’s taxable income is insufficient to absorb the credit for all qualified expenditures, the credit (in full or in the part not yet taken) is made in the returns for the following 3 tax years following the end of the year in which the new technology was entered in the records.
Taxpayers operating in a special economic zone pursuant to an SEZ permit may not claim the technology credit. Moreover, the tax acts require the taxpayer to increase the tax basis by the amounts previously deducted if within 3 years after entering the new technology in its records the taxpayer:
- Enters liquidating bankruptcy or liquidation
- Grants all or part of the rights to the new technology to other persons in any form, or
- Receives reimbursement for the expenditures in any form (such as a grant).
Significantly, the technology incentive may not be claimed by entities independently conducting research and development work which do not acquire the rights to the new technology (unless in cooperation with a scientific unit). However, such taxpayers may potentially take advantage of the technology incentive in the event of sale of the intellectual property rights they have created. Use of this “reverse” technology incentive may consist of offering a product which meets the conditions for treatment as a technology within the meaning of Art. 18b of the Corporate Income Tax Act (intangibles), which would entitle the buyer to take the technology credit. This would permit, for example, retention of the sale price (for the buyer reduced by the benefit resulting from taking the credit).
CIT taxpayers independently conducting innovative activity may enjoy tax benefits if they conduct research and development work at an R&D centre.
The status of an R&D centre is awarded by the Minister of Economy to businesses meeting specific conditions pursuant to the Act on Certain Forms of Support for Innovative Activity, and in particular businesses conducting research or development and generating net revenue from sale of goods and services and financial operations in the preceding financial year of at least EUR 1.2 million as determined under the Accounting Act. At least 20% of this amount must reflect net revenues from sale of the taxpayer’s own R&D services.
R&D centres may enjoy an exemption from real estate tax and agricultural and forestry tax on a de minimis aid basis with respect to taxable items engaged for the purposes of their R&D work, up to EUR 200,000 within a period of up to 3 years.
R&D centres may also create an innovation fund to cover the costs of their R&D work or costs connected with obtaining patents. If the statutory conditions are met, an R&D centre may deduct contributions to the innovation fund as revenue-earning costs at the time they are made (up to 20% of revenue in the given month), without waiting until the money in the fund is spent, so long as the money is spent by the end of the tax year. Meanwhile, the CIT Act does not contain provisions barring taxpayers from including among revenue-earning costs the expenditures financed out of the innovation fund. The tax authorities dispute this approach as tantamount to counting the same expenditure as a tax cost twice (interpretation issued by the director of the Warsaw Tax Chamber on 30 July 2010, No. IPPB3/423-265/10-2/MC). But the Province Administrative Court in Warsaw has taken the opposite view, permitting inclusion among tax costs of both contributions to the innovation fund and expenditures of the money in the innovation fund (judgment of 27 April 2012, Case No. III SA/Wa 2196/11). This judgment is not legally final, however, and a hearing in the matter before the Supreme Administrative Court is expected before the end of 2014.
Operations in a special economic zone
Businesses may also enjoy an exemption from corporate income tax, as a form of state aid, if they operate in a special economic zone under an SEZ permit. They are required to incur investment costs of at least PLN 100,000, and if private land is included in the territory of the SEZ, minimum investment costs of PLN 17 million are required, or hiring of at least 50 new workers. (The specific values depend on the location and unemployment rate in the given county.)
Taxpayers investing in innovations and operating in the R&D sector (defined in section 72 of the Polish Classification of Goods and Services) may count on preferential criteria for inclusion of private land in an SEZ. In the case of investments in innovations, this means incurring investment expenditures of PLN 20 million or hiring at least 30 new employees, or in the case of R&D activity, investment of at least PLN 10 million or creation of a minimum of 50 new jobs.
Costs of independent R&D work
Taxpayers independently conducting R&D work may also control the time when they recognise revenue-earning costs.
Costs of R&D work conducted independently, as a specific category of intangibles created by the taxpayer itself, but not purchased, and which can be subject to amortisation regardless of the anticipated period of use, may be settled through amortisation deductions.
R&D work may be subject to tax amortisation if it is completed with a positive result which may be used for purposes of the taxpayer’s business operations and:
- The product or technology created is clearly defined and the costs of the work are reliably determined
- The technical usefulness of the product or technology is duly documented and on this basis the taxpayer has decided to manufacture such products or apply such technology
- The documentation concerning the R&D work shows that the revenue from sale of the products or use of the technology will at least cover the costs of the R&D work.
The costs of R&D work as thus defined may be amortised in full in the course of 12 months, beginning with the month following the month in which the costs of the R&D work were booked.
If immediate 100% amortisation does not suit the taxpayer, the taxpayer may freely extend the amortisation period (in which respect the rate of amortisation for the intangibles may be elected only once, before beginning to take the deductions).
However, if the R&D work ends with a negative result, or a positive result but the minimum level required for including the costs of the work within intangibles is not fulfilled, it appears justified to include the expenditures incurred directly in revenue-earning costs, as long as all the expenditures were incurred with the purpose of generating revenue. The taxpayer may include expenditures in revenue-earning costs:
- In the month in which they were incurred
- Pro rata, beginning from the month they were incurred, in equal portions during a period of no longer than 12 months, or
- All at once, during the tax year in which the work was completed.
Moreover, it should be recognised that setting off the costs according to these rules is also possible if the result of the work was positive.
This overview may suggest that Poland still lacks adequate tax instruments for supporting innovation. Moreover, changes in this regard are not expected in the immediate future.
It should however be mentioned that amendments to income tax acts have been proposed which would create a mechanism for voluntary assignment of 1% of a taxpayer’s income tax to scientific units falling into classifications A+, A or B. Such funds from income tax could be used by the units to pursue their statutory purposes. Taxpayers paying at least PLN 1 million in income tax would be able to spread this support over a maximum of 3 units. This proposal is aimed primarily at supporting scientific units, however.
There are greater hopes tied to the Ministry of Economy proposal to support innovative activity through the Enterprise Development Programme through 2020. Among other incentives, it calls for 126% tax relief for qualified costs (100% of the costs being included among tax-deductible costs plus a tax credit for 26% of the costs). A tax benefit not used in a given tax year could be carried forward to future years. But so far there is not even a rough timetable for when these proposals might be enacted and enter into force.
Joanna Prokurat, Tax and New Technologies practices, Wardyński & Partners