Are the charges for the transfer of copyright to works paid to a related party excluded from the cost of obtaining revenue?

Individual tax rulings issued 17 September 2018 by the Director of National Tax Information 1 , refers to the significant amount of Polish law by the company – whose tax residence is located in the Republic of Poland – to the cost of obtaining revenue from the transfer of copyright to works. These charges were borne by the related entity to which the company ordered the production of certain works in accordance with its guidelines. Are these charges for the use or right to use these works?

Introduction

The applicant of the interpretation was sp. z o.o., gaining revenue from publishing games (hereinafter referred to as tracks) on mobile devices such as phones and tablets, as well as from micropayments made by users and from displaying advertisements contained in these tracks. The request for interpretation was received by the tax authority 4 July 2018 and due to formal requirements, it was supplemented 12 September That year.

According to the facts presented by the company, it concluded an agreement with an appropriate technical base and qualified staff of a related entity in order to create, modify and maintain works.

These are works according to the Act with 4 February 1994 about copyright and related rights 2 (Further to the Copyright Act, and when acquiring property rights to them, the applicant has the right to publish them in Google Play and iTunes stores and generate revenue from them.

The object of copyright is any individual creative activity, determined in any form, regardless of the value, purpose and manner of expression (the track)[3].

When discussing the facts, the company indicated that the fees related to the development and production of works by the related entity concerned the performance of certain services: the design and recording of the computer code necessary to design and develop the software application at the request of the client 4 ; execution of an application for individual order, combination, adaptation and installation of an existing application in such a way that it is functional in the customer's IT environment[5].

According to the applicant, the service of remaining a related entity in readiness for full maintenance of works – a de facto after-sales service – should also be classified under the same PKWiU symbol.

On the basis of the above agreement, the applicant paid fees to the related entity for:

(a) the transfer of copyright to works, (b) the development and manufacture of works, and to remain ready for full maintenance of such works. The fees were derived from the revenues of the company obtained from the publication of works.

The company asked in its request whether the fees for transferring copyright rights to works to the applicant, borne by the company to the related entity, are subject to restrictions on the applicant's part of the cost of obtaining revenue resulting from the provisions Article 15e Act on 15 February 1992 on corporate income tax 6 (Come on. the Corporate Income Tax Act)? According to the company, the fees are not subject to such restrictions.

Exemptions from revenue costs

Under the provision laid down in the proposal, taxpayers are obliged to exclude from the cost of obtaining revenue costs:

1) advisory services, market research, advertising, management and control services, data processing, insurance, guarantees and similar services,
2) any charges and charges for the use or right to exercise the rights or values in question under Article 16b(1)(4-7) the Corporate Income Tax Act,
3) the transfer of the debtor's default risk from loans other than those provided by banks and cooperative savings and credit institutions, including liabilities arising from financial derivatives and similar benefits

directly or indirectly committed to related entities in question under Article 11 the Corporate Income Tax Act or entities domiciled, established or managed in the territory or in the country mentioned in the legislation issued pursuant to Article 9a(6) the Corporate Income Tax Act, in the part in which the total costs in the tax year exceed 5% the amount corresponding to the surplus of the total revenue from all sources of revenue less interest revenue over the sum of the cost of obtaining revenue less the value recorded in the tax year to the cost of obtaining the depreciation revenue in question under Article 16a-16m, and interest[7].

The applicant indicated that, according to Article 15e(11) u.o.d.o.p., the restriction in question Under section 1, does not apply to:

1) the cost of services, fees and charges referred to Under section 1, the costs of obtaining revenue directly related to the production or acquisition by the taxable person of the goods or the provision of the service;
2) the cost of the services in question under Article 8(2a) Goods and Services Tax Act;
3) insurance services provided by the entities concerned under Article 15c(16)(6) and
4) guarantees and guarantees provided by the entities concerned under Article 15c(16)(1-3), 6 and 7.

According to Article 11(1) u.p.,d.o.p., which refers to related entities where:

a natural person, a legal person or an organisational unit not having legal personality, having its domicile, seat or management in the territory of the Republic of Poland, hereinafter referred to as ‘national entity’, shall be directly or indirectly involved in the management of an undertaking located outside the territory of the Republic of Poland or in its control, or having a share in the capital of that undertaking, or
a natural person, a legal person or an organisational unit not having legal personality, domiciled, established or managed outside the territory of the Republic of Poland, hereinafter referred to as ‘foreign entity’, shall participate directly or indirectly in the management or control of the national entity, or have a share in the capital of that national entity, or
the same natural person, legal person or organisational unit not having legal personality simultaneously, directly or indirectly, participate in the management or control of the national and foreign entity, or have a share in the capital of those entities

and if, as a result of such links, conditions are established or imposed which differ from those which would have been determined by independent entities, and as a result, the taxable person does not show income or shows income below those expected to exist, the income of the taxable person concerned and the tax due shall be determined without account being taken of the conditions resulting from those links.

In turn Article 16b(1) the Corporate Income Tax Act provides that depreciation is subject to Article 16c, acquired from another entity suitable for economic use on the date of acceptance for use:

1) a cooperative property right to a dwelling,
2) cooperative right to a utility premises,
3) right to a single-family home in a housing cooperative,
4) copyright or related property rights,
5) licences,
6) the rights specified in the Act of 30 June 2000 – Industrial property law[8] (continue,
7) value equivalent to knowledge gained in industrial, commercial, scientific or organisational fields (know-how)

of an estimated period of use of more than one year, used by the taxable person for purposes related to his business activity or put into use by him under a licensing agreement (sublicence), lease, lease or contract specified under Article 17a(1) the Corporate Income Tax Act, called intangible assets.

The company clarified in the application, describing the fact that its activities could not be related to Article 15e(1)(1) the Corporate Income Tax Act, because the entity associated under the agreement with the company does not perform any advertising and advisory services and does not process data.

Nature of fees for the transfer of copyright

In this situation, it became crucial to respond to the individual question of the company in its request for interpretation, whether the charges for the transfer of copyright to works paid to the related party are charges for the use or use of those works. If so, fees for the transfer of copyright property, under Article 15e(1)(2) the Corporate Income Tax Act, with regard to Article 16b(1)(4-7) the Corporate Income Tax Act, would be excluded from the cost of obtaining revenue.

In the applicant’s view, the fees for the transfer of copyright to works made to a related party are not charges for the use or use of such works and are therefore not subject to restrictions on tax costs. The company also indicated in its proposal the consistency of its assessment with the position of the Ministry of Finance presented in the tax explanations[9].

The applicant also pointed out that the Corporate Income Tax Act lack of definition of fees and charges for the use or right of use of works and referred to this extent to Article 12(2) OECD Model Convention on property and income tax 10 (hereinafter the Model Convention). Namely used under Article 12 the term ‘licensing receivables’ means any claim paid for the use or use of any copyright in a literary, artistic or scientific work, including films for cinemas, any patent, trademark, design or model, technology secret or production process, or for the use of professional experience in the field of industrial, commercial or scientific[11].

Under point 8 Comment to Article 12 The taxation of royalties (hereinafter Commentary) is defined as generally linked to rights or assets that are different forms of literary or artistic property, intellectual property elements as defined in the text, as well as information related to acquired experience in the industrial, commercial or scientific field.

The definition includes remuneration for the use or right of use of those rights, whether or not they were in the State Register. The definition covers both the fees paid as a result of licensing contracts and the compensation that a person would have to pay for unauthorised copying or violation of rights.[12].

The company also indicated that according to point 8.2 Commentary, if the payment is linked to the transfer of ownership (in the case of the applicant it is about copyrights), then the claims on the transfer cannot be considered to be claims for use or the right to use these values.

According to that provision: ‘If a payment is made in return for the transfer of the full ownership of the property referred to in the definition, such payment shall not be considered as remuneration for the use or right to use that property and therefore cannot be regarded as a royalty...

Difficulties may arise in the event of a transfer of rights which may be regarded as part of the property listed in the definition if those rights are transferred in a way constituting the transfer of ownership.

For example, it may be about granting exclusive intellectual property rights for a limited period or any rights to property in a limited geographical area in a transaction organised as a sale. Each case will depend on its particular facts and will require examination in the light of national legislation (...)[13].

According to the applicant, the Commentary is the primary source of interpretative directives against the provisions of the Model Convention.

Costs directly linked to the provision of services

Interestingly, the applicant also pointed out that, if the charges for transferring copyright to works were considered to be charges for the use or use of works, they constitute costs directly linked to the provision by the company of services relating to the publication of works in mobile app stores, resulting in revenues, and therefore are not subject to restrictions on the inclusion of costs by virtue of Article 15e the Corporate Income Tax Act

In the company's assessment, since neither the Corporate Income Tax Act, nor does any other legal regulation define the cost of obtaining revenues directly linked to the provision of services by the taxable person, a linguistic interpretation must be made to determine what such costs are. Article 15e(11)(1) the Corporate Income Tax Act, according to which “the restriction in question Under section 1, does not apply to: costs of services, fees and charges in question Under section 1, the costs of obtaining revenue directly related to the production or acquisition of goods or the provision of services by the taxable person.’

The applicant here referred to the dictionary term ‘direct’, meaning ‘non-intermediate links, concerning someone or something directly’.[14]. According to the company, without making the fees discussed here, it could not publish works in mobile app stores and place advertisements in them and, consequently, generate revenue.

The company also indicated that an internal interpretation would also help to determine the costs directly linked to the provision of services by the taxable person and interpret Article 15e(11)(1) the Corporate Income Tax Act please refer to Article 15(4b) the Corporate Income Tax Act,

according to which the costs of obtaining revenue directly related to the revenue relating to the revenue of the tax year concerned and incurred after the end of that tax year until: drawing up the financial statements, in accordance with separate provisions, no later than the expiry of the time limit for the statement, if the taxable persons are required to draw up such a report, or to provide a statement, but no later than the expiry of the time limit for the submission of that statement, if the taxable persons, in accordance with separate provisions, are not obliged to draw up the accounts, are to be deducted in the tax year in which the corresponding revenue was obtained.

The company also cited the position of the tax authorities, indicating the cost directly linked to revenue as ‘a cost that can be linked to a particular income; an expense that would be reduced by a specific income of the taxpayer’, or as ‘expenditure that directly affects the value of the revenue achieved’ 15 .

The applicant also referred to one of the individual interpretations of the Director of National Tax Information, in which he stated, inter alia, that ‘in line with the established view, the cost of obtaining revenue directly linked to revenue is such expenditure which translates directly (directly) into obtaining specific revenue.

In their case, it is possible to ‘identify’ the impact of a given cost on the amount of revenue achieved. This category mainly includes the costs which may be allocated to certain products or services.’ 16 .

The applicant concludes that if he pays to the related party a charge for the transfer of copyright to works and obtains the right to place them in mobile app stores, which allows him to generate revenue, those fees should be regarded as directly related to the company's provision of services.

From the publication of a particular work, the applicant has a specific income, and ‘the cost of acquiring copyright rights for the work which is, inter alia, a “carrier” of advertising and allows users to make micropayments results in a certain income.

Thus, also for this reason, fees for transferring copyright rights to works to the applicant may constitute the cost of obtaining income from the applicant without any limitation resulting from Article 15e(1) the Corporate Income Tax Act 17

Position of Director of National Tax Information

The Director of National Tax Information (hereinafter the Director of KIS) considered the applicant’s position on the legal assessment of the facts to be correct, under the applicable legal framework. In its statement of reasons, the tax authority, examining the property rights of works, limited its interpretation to an analysis of the expenses incurred by the company in terms of its applicability Article 15e the Corporate Income Tax Act, and not to meet the general conditions for recognising the expenditure as a cost of obtaining income.

The Director of KIS recalled that the rules governing the eligibility of expenditure for revenue-revenue costs lay down Article 15(16) the Corporate Income Tax Act, a Article 15(1) the cost of obtaining revenue is the costs incurred in order to obtain revenue from the source of revenue, or in order to preserve or secure the source of revenue, with the exception of those costs under Article 16

section 1. The Director of KIS also pointed out that this definition of the legislator is of a general nature and therefore the expenditure incurred by the taxpayer should be analysed individually. The exception is that the Act clearly indicates the attribution of expenditure to the category of revenue costs or excludes the possibility of such costs being credited to such costs.

About Article 15e(1) the Corporate Income Tax Act, The Director of KIS recalled that it refers to those entities which are related entities and provide the services listed in that provision and stressed that both conditions had to be met together. He also pointed out that according to the PWN Dictionary, the term "use" means "1. benefit from something, exploit something’; 2. „use something, use something as a tool, a means.”

The Director of KIS further cited the following passage of the tax explanations from 24 April 2018:

„This concept (“use”) also occurs in the legal language, and so according to Article 140 Act on 23 April 1964 Civil Code 18 ((cc) governing the scope of the property rights within the limits laid down in the laws and principles of social coexistence, the owner may, except for other persons, use the items in accordance with the social and economic purpose of his law, in particular collect benefits and other income from the goods.

Within the same boundaries, he can control things.

It follows from the above that both in the colloquial language and in the legal language “use” of the thing or the law constitutes the essence of the right of the owner of the item or the law. It includes aspects such as the use of things (rights) or the taking of benefits from them or other income from them.

The right to use things (right) is opposed to the right to dispose of things (right), to dispose of them.

In so far as the right to use the item (right) may not only be granted to the owner (user, licensee, tenant, lessee, the person using the lease agreement), but the right to the regulation is a thing (the law) strictly related to the ownership right.

The right to use a particular thing or right is the essence of the licensing agreement (sublicense), the lease agreement (Article 659-679 (c) leases (Article 693-709 (c) or leasing contracts (Article 7091-70918 k.c.).

The License Agreement (license) is an expressis verbis agreement indicated in the Copyright Act in its Article 41(2) and in u.p. Under Article 66(2) and Article 76-Article 81 (in the field of invention), Article 163 (in the field of trade mark). The licence agreement may also apply to other rights as defined in u.p.

Since the restriction concerns (all types of) fees and charges for the use or right to exercise the rights and values in question under Article 16b(1)(4-7) the Corporate Income Tax Act, restrictions with Article 15e the Corporate Income Tax Act will not be subject to costs (fees and charges) for the transfer of rights listed under Article 16b(1)(4-7) the Corporate Income Tax Act This is the distinction that currently exists, for example, on the ground Article 12(2) The OECD Model Convention, which defines royalties as any kind of charge paid for use or right of use (...)’ 19 .

The Director of KIS therefore considered that, given the above explanations and the description of the facts in the request for interpretation, the fees paid by the company for the transfer of copyright rights to works are not subject to the above limits.

Under Article 15e(1) the Corporate Income Tax Act, and the applicant’s position is correct. The tax authority also stated that, in view of such a ruling, it is pointless to analyse whether these charges are expenditure directly linked to the services provided by the company.

Summary

Individual tax ruling from 17 September 2018 is essential in the context of agreements between related parties.

In practice, it is quite common to transfer property copyright to works complying with the Act of 4 February 1994 on copyright and related rights, which is why it is so important for taxpayers to have no restrictions on the inclusion of fees for this reason as a cost of obtaining revenue.

Exemptions from revenue costs are defined under Article 15e(1) the Corporate Income Tax Act, and one These exemptions apply to all types of charges and charges for use or rights or values.

Therefore, it was so important in the above interpretation to determine whether the fees for the transfer of copyright to works, paid to a related party, are precisely such fees for the use or use of such works. According to the applicant, this is not the case. The tax authority confirmed the position of the company.

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1 Individual tax ruling from 17 September 2018, reference no. 0111-KDIB1-3.4010.327.2018.2.MO. [2] i.e. Journal of Laws of 2018, item 1191. [3] Article 1(1) Copyright Act.

4 Software design, programming and development services – symbol 62.01.11.0 Polish Classification of Products and Services, introduced by the Regulation of the Council of Ministers from 4 September 2015; Journal of Laws of 2015, item 1676. [5] Ibid. [6] i.e. Journal of Laws of 2018, item 1036.

[7] Article 15e(1) the Corporate Income Tax Act, which began to apply with 1 January 2018, by Article 2(18) Act on 27 October 2017 amending the Personal Income Tax Act, the Corporate Income Tax Act and the Flat-rate Income Tax Act on certain revenues generated by individuals; Journal of Laws of 2017, item 2175. [8] i.e.

Journal of Laws of 2017, item 776. 9 Explanations on the amount of the cost of obtaining revenues related to the acquisition of certain types of services and rights, Ministry of Finance, opubl.

24 April 2018; https://www.mf.gov.pl/documents/764034/6350781/2+Kategoria+us%C5%82ug+objetych+art.15e+ust.1+%28final%29 10 OECD Model Tax Convention on Income and on Capital, published with exchange parties In 1992 11 Model OECD Convention. Short version, July 2010, Wolters Kluwer, Warsaw 2011, p.

39, https://read.oecd-ilibrary.org/taxation/model-tax-convention-on-income-and-on-capital-condensed-version-2010_9789264045095-pl#page39 [12] Ibid. p. 274. [13] Ibid. p. 275. 14 Universal dictionary of English, volume 1, PWN Scientific Publishing, p.

15 The Director of the National Tax Information refers here to decisions: Director of the Tax Chamber in Warsaw on the scope of application of tax law from 10 September 2007, reference no. 1401/BP-II/4210-56/07/JM and Director of the Tax Chamber in Warsaw with 23 August 2007, reference no. 1401/BP-I/4210-52/07/MC.

16 Interpretation of individual tax law with 8 March 2018, reference no. 0111-KDIB1-2.4010.2.2018.1.AW. 17 Individual tax ruling from 17 September 2018, op.cit. [18] i.e.

Journal of Laws of 2018, item 1025 as amended 19 Explanations of the Ministry of Finance from 24 April 2018, concerning the amount of the cost of obtaining revenue relating to the acquisition of certain types of services and rights, op.

cit., Categories of services covered Article 15e(1) the Corporate Income Tax Act, point II, Use of rights; https://www.mf.gov.pl/documents/764034/6350781/2+Kategoria+us%C5%82ug+objetych+art.15e+ust.1+%28final%29