American Investor, Spring 2016
Or does it? The new R&D tax relief is broader than the previous technology relief, but only a modest percentage of eligible costs can be deducted
Innovation is universally recognized as one of the fundamental conditions for a competitive economy. Fostering innovation is one of the tasks assumed by the European Union and the individual member states.
The Innovation Support Act of September 25, 2015, is designed to support Polish businesses in developing innovative solutions. The main way the act seeks to achieve this goal is through introduction of a new tax deduction—R&D relief—in the Corporate Income Tax Act and the Personal Income Tax Act.
Scope of R&D relief
The scope of R&D relief is specified in the definitions section of the Innovation Support Act. First, the act defines research and development activity to mean creative activity including (i) scientific research and (ii) development work undertaken systematically with the aim of increasing resources of knowledge or exploiting such resources to create new solutions. The concept of scientific research is broken down into three categories:
- Basic research—original research, experimental or theoretical work undertaken primarily to obtain new knowledge about fundamental phenomena and observable facts, without the expectation of immediate commercial application
- Applied research—research work undertaken with the aim of obtaining new knowledge oriented primarily to practical application
- Industrial research—research aimed at obtaining new knowledge and skills in order to develop new products, processes or services or introduce significant improvements in existing products, processes and services.
Development work is understood to mean work consisting primarily of exploiting existing knowledge to create and design new, modified or improved products, processes and services, excluding work on periodic and routine changes, even if they do constitute improvements.
Rules for taking R&D relief
Under the new regulations, taxpayers taking R&D relief must segregate the costs of their research and development work in their accounting records or, in the case of legal persons, in their register of fixed assets and intangibles. Through R&D relief, the taxpayer is entitled to take an additional deduction from taxable income for the amount of revenue- earning costs incurred for R&D activity, referred to in the act as “eligible costs,” including costs of:
- Salaries for staff hired to conduct R&D activity, and their related non-salary employment costs
- Acquisition of materials directly connected with R&D activity
- Expert opinions, consulting and similar services, as well as research conducted under a service contract, but only if the contractor is a scientific unit and the services are acquired for the purpose of conducting R&D activity
- Paid use of apparatus and research equipment, dedicated exclusively to R&D activity (and acquired from unaffiliated entities)
- Depreciation of fixed assets (excluding passenger cars, buildings, other structures and separately owned premises) and intangibles used in R&D activity.
The Innovation Support Act also introduces an additional condition for eligible costs incurred in connection with basic research. Such costs can be deducted only if the basic research was conducted pursuant to an agreement with a scientific unit within the meaning of the Act on the Rules for Funding of Science of April 30, 2010.
The relief may be taken by taxpayers who are individuals earning income from non-agricultural economic activity, regardless of whether they are taxed under general rules or under a flat rate (which was not possible in the case of the previous technology relief).
Taxpayers who operate in a special economic zone during the tax year are not eligible for the relief. Taxpayers also lose the right to R&D relief if they are reimbursed in any form for the eligible costs.
Amount of deduction
Unfortunately, eligible costs are not subject to an additional deduction in full. Micro, small and medium-sized enterprises have a right to a 20% deduction, and other enterprises 10%, except for salaries and non-salary employment costs of staff hired to perform R&D activity, where there is a 30% deduction. Moreover, the amount of the deduction is capped at the amount of income obtained from non-agricultural economic activity during the tax year.
The deduction is taken in the tax return for the year in which the eligible costs are incurred by the taxpayer. If the taxpayer cannot take some or all of the deduction in that year because the taxpayer had a loss or had insufficient income to take the full deduction, it may be carried forward for the next three tax years.
Elimination of existing relief
The R&D relief replaces the previously functioning relief for new technologies. The technology relief had a much narrower scope. It covered only expenditures on new technologies constituting intangibles (such as licenses and intellectual property rights) which had not been used anywhere in the world for longer than five years. Technology relief did not cover fixed assets. Moreover, a condition for taking the relief was to obtain an opinion from an independent scientific unit confirming the innovativeness of the acquired technology. In the case of individual taxpayers, technology relief was available only to those taxed under general rules, not at the flat rate. But the amount that could be deducted was higher, at 50% of the incurred costs.
R&D relief entered into force on January 1, 2016. However, taxpayers who obtained the right to technology relief prior to the end of a tax year that began before January 1, 2016, as well as taxpayers whose tax year does not coincide with the calendar year, will retain the right to the technology relief under the prior rules.
Will it matter?
The final form selected for R&D relief has met with criticism. The significant reduction in the amount that can be deducted, as compared to the amount originally included in the draft of the Innovation Support Act, as well as the requirement to contract out research services only to scientific units, raises doubts whether the relief will achieve the desired results and actually attract foreign investors to Poland and encourage taxpayers to conduct R&D projects in Poland.
It remains to be seen whether taxpayers take more advantage of the new R&D relief than they did of the previous technology relief, and what influence this new tax incentive will have on the growth of innovation in Poland.
Miejsce publikacji: American Investor, Spring 2016