Research and development – selected issues in claiming corporate income tax relief in light of individual tax rulings

From 2018 the rules for clearing under the so-called R & D relief in question have changed under Article 18d Act on 15 February 1992 on corporate income tax[1] . Tax payers must pay attention to a number of important aspects of their work in order to benefit from a preferential settlement. This particularly applies to labour costs. What are the conclusions of the most recent interpretations by tax authorities?

Introduction

In relation to the cost of development work, the legislator has laid down in the Corporate Income Tax Act specific regulations that regulate the moment when these costs are recognised for tax purposes. According to Article 15(4a) the Corporate Income Tax Act, development costs may be included in the cost of obtaining revenue in one of the following ways:

• • in the month in which they were incurred or from that month in equal parts for a period not exceeding 12 months, or
• • once in the tax year in which they were completed, or
• • by depreciation written down in accordance with Article 16m(1)(3) the Corporate Income Tax Act from intangible assets referred to under Article 16b(2)(3) the Corporate Income Tax Act

This is a derogation from the general rule that

• The costs of obtaining revenue directly related to revenue incurred in the years preceding the tax year and in the tax year shall, as a general rule, be deferred in that tax year in which the corresponding revenue was achieved, with reservations[2] ;
• the cost of obtaining revenue, other than those directly linked to revenue, shall be deferred on the date on which they are incurred[3] . Where these costs relate to a period exceeding the tax year and it is not possible to determine what part of them relates to the tax year in question, they shall in that case constitute the cost of obtaining revenue in proportion to the length of the period to which they relate.

In turn, in order to benefit from the R & D relief, the taxpayer must carry out an analysis aimed at:

• • identification of economic activities that may be considered as R & D[4] ;
• • determining the cost of research and development by identifying costs meeting the definition of ‘qualified costs’[5] ;
• • identification of documentation justifying the right to benefit from the relief and the fulfilment of formal obligations[6] .

In general, it can be pointed out that in order for a corporate tax taxable person to be entitled to deduct in the tax return the eligible costs incurred in a given tax year, the following conditions should be met cumulatively:

• • the taxpayer has incurred costs for R & D,
• • R & D costs were the costs for the taxpayer to obtain revenue within the meaning of the Corporate Income Tax Act,
• • R & D costs are included in a closed catalogue of eligible costs, defined by the regulations Article 18d(2-3) the Corporate Income Tax Act;

• the above-mentioned revenue costs were eligible costs within the meaning of the Corporate Income Tax Act, where the eligible costs have been incurred in basic research, these studies have been carried out on the basis of a contract or agreement with a scientific unit in the understanding of separate provisions, • in the records in question under Article 9(1b) the Corporate Income Tax Act, the taxpayer has distinguished the costs of research and development,
• the taxable person has demonstrated in the tax return the eligible costs to be deducted,
• the amount of eligible costs deducted does not exceed the limits set out in the O.R.D.O.p.,
• the eligible costs have not been reimbursed to the taxpayer in any form.

Definitions of R & D and development work

The legislator introduced a definition of R & D activities under Article 4a(26) the Corporate Income Tax Act, it must be understood as a creative activity involving research or development undertaken systematically to increase knowledge resources and use knowledge resources to create new applications.

The statutory definition therefore shows that such activities must be creative. The use of this phrase indicates that R & D activities are activities that are geared towards creating new and original solutions, often of a unique nature, which are not regenerative.

Second, under Article 4a(26) the Corporate Income Tax Act it follows that R & D must be undertaken systematically. This is to be understood as a prohibition on the reduction of the taxpayer's frivolous activities. After third, such activities must have a specific purpose, i.e. should be targeted at increasing knowledge resources and their use for new applications. According to Article 4a(27) the Corporate Income Tax Act, Whenever the law refers to scientific research, this means:

• • Basic research – original research, experimental or theoretical, undertaken primarily to gain new knowledge of the foundations of phenomena and observed facts without a direct commercial application,
• • applied research — research undertaken to gain new knowledge, focusing primarily on practical application,

• Industrial research — research to gain new knowledge and skills to develop new products, processes and services or to make significant improvements to existing products, processes and services; these studies shall take into account the creation of component elements of complex systems, the construction of prototypes in a laboratory environment or in an environment simulating existing systems, in particular to assess the suitability of the technologies concerned, and the construction of the pilot lines necessary for these studies, including evidence for generic technologies.

Content Article 4a(28) the Corporate Income Tax Act, Whenever the Act refers to development work, this means acquiring, combining, shaping and exploiting currently available knowledge and skills in science, technology and business, and other knowledge and skills for production planning and for the development and design of new, modified or improved products, processes and services, excluding work involving routine and periodic changes to products, production lines, manufacturing processes, existing services and other ongoing operations, even if such changes are of an improvement nature, in particular:

• development of prototypes and pilot projects and demonstrations, testing and validation of new or improved products, processes or services in an environment that is a model of conditions of actual operation whose main purpose is to further technical improvement of products, processes or services the final shape of which has not been defined,
• the development of prototypes and pilot projects that can be used for commercial purposes, where the prototype or pilot project is a final product ready for commercial use and its production for demonstration and validation purposes only is too costly.

A distinction is crucial in the definition of R & D activities which indicates that such activities include two types of activity, i.e.: ((i) research[7] and (ii) development work[8] . Such innovative, creative nature of the work is first an aspect which entrepreneurs must analyse, without a catalogue or scope of work which may be considered to be such. This is highlighted in a number of tax rulings.

Conditions for research and development

Director of National Tax Information in an individual interpretation from 4 December 2017[9] stated that: “It should therefore be pointed out that innovation is any change that improves something, gives new quality or allows for the creation of a new product, service or new quality.

This may be a radical change, giving a completely new product, but also a partial one, led to the improvement of the product. Therefore the definition of this word is very broad" (such as the Director of National Tax Information in an individual interpretation from 14 March 2017[10]).

In turn the Director of National Tax Information in an individual interpretation with 14 November 2017[11] confirmed that features such as product improvement, systematicity, lack of routineity and periodicity of product changes, increasing the knowledge resources used by the taxpayer to create new applications, i.e. solutions to achieve a higher quality of products, shows the innovation of the actions taken.

On the other hand, the Director of National Tax Information in an individual interpretation from 6 November 2017[12] He pointed out that ‘It follows from the statutory definition that such activities must be creative.

The use of this phrase indicates that R & D activities are activities that are geared towards creating new and original solutions, often of a unique nature, which are not regenerative. Second, under Article 4a(26) the Corporate Income Tax Act it follows that R & D must be undertaken systematically.

These grounds should be understood as a ban on the relief of the taxpayer's estranged actions. After third, such activities must have a specific purpose, i.e. should be geared towards increasing knowledge resources and using them to create new applications."

Prototyping may also constitute R & D within the meaning of the legislation the Corporate Income Tax Act Director of National Tax Information in the already cited individual interpretation from 4 December 2017[13] stated that ‘Development work combines research results with technical knowledge to introduce a new or upgraded product, new technology or new organisation system into production.

Development work may include the development of prototypes and pilot projects and demonstrations, testing and validation of new or improved products, processes or services in an environment that is a model of conditions of actual operation, the main purpose of which is to further technical improvement of products, processes or services whose final shape is not defined.

Development work may also include the development of prototypes and pilot projects which can be used for commercial purposes, where the prototype or pilot project is a finished product ready for commercial use and its production for demonstration and validation only is too costly.

Development work does not include routine and periodic changes to existing products, production lines, manufacturing processes, services, even if such changes are of an improvement nature.

The projects described above clearly contain elements of innovation and fulfil statutory definitions relating to research and development activities" (for comparison, the individual interpretation of the Director of National Tax Information with 1 June 2017, reference no. 2461-IBPB-1- 3.4510.112.2017.l.MST).

Deduction of costs under the R & D relief

As a relief, according to Article 18d(1) the Corporate Income Tax Act, a taxable person who gains revenue other than capital gains, deducts from the tax base established in accordance with Article 18, specific costs for obtaining revenues for R & D activities, hereinafter referred to as ‘eligible costs’. The amount of the deduction may not exceed in the tax year the amount of income obtained by the taxpayer from income other than income from capital gains.

As applicable from 1 January 2018 The following shall be considered eligible costs:

• receivable in respect of the titles in question during the month in question under Article 12(1) Act on 26 July 1991 on personal income tax[14], and paid by the payer the contributions for these debts as laid down in the Act of 13 October 1998 on the social security system[15], in so far as the time allocated to the implementation of the research and development activities remains at the overall working time of the employee in a given month;
• receivable in respect of the titles in question during the month in question under Article 13(8) point (a) u.p.d.o.f. and the contribution for these debts, as specified in u.s.u.s., financed by the payer, in such a part as the time allocated to the R & D service remains entirely the time allocated to the service under the contract or contract for the work in that month. On the other hand, R & D relief deductions are not subject to contributions to the Labour Fund and the Guaranteed Workers' Benefits Fund.

These costs shall be deducted if they have not been reimbursed to the taxpayer in any form or have not been deducted from the income tax base (Article 18d(5) the Corporate Income Tax Act).

However, according to the content Article 18d(6) the Corporate Income Tax Act, a taxable person who has been established in a special economic zone on the basis of a permit during the tax year shall be entitled to deduct only in respect of eligible costs which are not included by the taxable person in the calculation of the tax exempt income on the basis of the permit.

Article 18d(7) the Corporate Income Tax Act as applicable to 29 April 2018 shall contain limits on the amount of eligible costs and shall not exceed:

• • where the taxable person concerned Under section 3a is a micro-entrepreneur, small or medium-sized entrepreneur, within the meaning of the rules on freedom of establishment, 150% costs in question Under section 2-3a;
• • for other taxable persons in question Under section 3a-150% costs in question Under section 2 point 1-4a and section 2a-3a, and 100% costs in question Under section 2 point 5;

• for other taxable persons, 100% costs in question Under section 2-3. State Article 18d(7) the Corporate Income Tax Act as applicable from 30 April 2018, which has been modified on the basis of Article 27 Act on 6 March 2018 Provisions introducing the Act - Business Law and other laws concerning business activity[16], the amount of eligible costs may not exceed:

• • where the taxable person concerned Under section 3a is a micro-entrepreneur, small or medium-sized entrepreneur, within the meaning of u.p.p.p. – 150% costs in question Under section 2-3a;
• • for other taxable persons in question Under section 3a-150% costs in question Under section 2 point 1-4a and section 2a-3a, and 100% costs in question Under section 2 point 5;
• • for other taxable persons, 100% costs in question Under section 2-3.

Calculation of employment costs for R & D activities against tax rulings

• Director of National Tax Information in interpretation of 20 March 2017[17] He explained that: “It must be stated that employees employed... in order to carry out R & D activities should be regarded as such workers who can objectively contribute to R & D work, but it is not necessary to create the actual effect of their work. Therefore, if the persons employed have sufficient competence to participate in or support R & D projects, and can objectively contribute to R & D activities and, in addition to their responsibilities, remain R & D work, such persons may be considered employed for the purpose of carrying out R & D activities of the Company." It is important that the employee actually performs the R & D tasks.

It is not sufficient for a contract of employment to indicate as a competence the activities which constitute the execution of activities eligible for R & D activities. In order for his remuneration to be a eligible cost, he must actually participate in such work.

In turn, as the Director of National Tax Information indicated in the interpretation from 14 December 2017[18]:

• • Whereas the provisions of the Corporate Income Tax Act do not specify and impose restrictions on what the employment of an employee should result from in order to carry out research and development activities,
• • the most important criterion determining the inclusion of the eligible costs in question under Article 18d(2)(1) the Corporate Income Tax Act with regard to the R & D relief, is the actual performance of the R & D activity by the employee,

• provisions the Corporate Income Tax Act they do not explicitly require the employment purpose to be indicated in the employment contract or the obligation to record the working time of employees employed for the purpose of carrying out research and development activities, and the legislature did not impose on entrepreneurs the form of division/segregation of these costs; consequently, the choice of how to document these expenses was left to taxpayers who carry out research and development activities.

Therefore, the use or non-use of the term "research and development" in employment contracts should not have any impact on the assessment of activities as R & D activities or the recognition of wage and social security contributions as eligible costs. For the purposes of the legal assessment of the tasks carried out by employees as an activity carried out in the framework of research and development, it is not necessary to include in the contract of employment provisions stating precisely that a particular worker carries out research and development activities.

Recording of working time

In order to determine whether workers carry out research and development activities, the scope of the activities actually carried out by them, i.e. participation in the implementation of the projects described in fact, should be decisive. The working time of the staff involved in the implementation of the projects must be recorded, which is to ensure that only the work hours actually allocated to the implementation of the research and development work are taken into account.

Such an organisational aspect has recently been highlighted by the Director of KAS in his interpretation of 28 August 2018[19]. It pointed out that ‘tax rules give the possibility to consider eligible costs to pay a worker who fulfils the stated objective, i.e. performs research and development.

An employee whose duties remain active in carrying out research and development should be considered as an employee employed to carry out research and development activities. However, it is also important that the employee actually performs the tasks of research and development.

It is not sufficient, therefore, that the employment contract or other document confirms that, within the scope of the competence of the employee concerned, the carrying out of research and development activities is carried out and that the employee must actually participate in the work.

Only then will the remuneration of such a worker and the cost of benefits incurred for him be eligible in full.’

This means that where a worker performs duties not only related to R & D activities, it is justified to separate (exclusion from R & D relief) this part of the remuneration and benefits paid to R & D workers, as well as contributions to these revenues, as defined in u.s.u.s., which is not related to the implementation of R & D activities.

The legislature did not impose on entrepreneurs the form of such division/segregation. The choice of how to document these expenditures was left to taxpayers who carry out R & D activities. It is therefore desirable that, for evidence purposes, the record of working time devoted by workers to R & D activities be kept by the taxable person benefiting from the relief.

In addition, it should be pointed out that in the Ministry of Finance’s communication from 18 May 2017 It was clearly stated that ‘(...) the keeping of such records is explicitly provided for in the legislative proposal set out in the draft Act amending certain laws to improve the legal environment of innovative activities’. The legislator proposes that salaries and contributions constitute eligible costs (which are the basis for calculating the R & D relief) in such a way that the time spent on R & D activities remains at the general time of the employee (...)’.

The taxable persons must therefore document the working time of the worker in a certain form of records, while at the same time distributing the time spent by the worker in carrying out research and development activities in relation to the total number of hours worked by him.

It should also be noted that Article 9(1b) the Corporate Income Tax Act imposes on taxable persons who intend to benefit from the R & D allowance an obligation to separate the costs of R & D activities (including labour costs) in their tax books. The way in which the taxpayer distinguishes costs should enable the correct identification of the eligible costs which give the right to benefit from the reduction, in an amount adequate to the corresponding type of eligible cost.

Director of National Tax Information in an individual interpretation from 16 November 2017[20] stated that ‘The legislator did not impose on the entrepreneurs the form of such separation (division) of part of the remuneration. The choice of how to document these expenditures was left to taxpayers who carry out R & D activities.

It is therefore recommended that, for evidence purposes, records of the working time of employees involved in the R & D activities of the taxpayer be kept. In the light of the above, it should be pointed out that in the case of temporary posted workers who carry out the standard activity of the Applicant, but also partially carry out research and development activities, the costs of their employment may be included in the eligible costs in proportion to the share of the employee in the R & D work in relation to all his work, on the basis of working time records."

Similar positions in proportion/audience were presented by the Director of National Tax Information in individual interpretations on:

• • 16 November 2017, reference no. 0111-KDIB1-3.4010.387.2017.1.AP0,
• • 15 November 2017, reference no. 0111-KDIB1-3.4010.266.2017.3.MST,
• • 17 October 2017, reference no. 0111-KDIB1-3.4010.207.2017.3.MST,
• • 10 May 2017„ reference no. 0114-KDIP2-1.4010.68.2017.1.MR,
• • 14 April 2017, reference no. 2461-IBPB1-3.4510.68.2017.1.IZ,
• • 24 October 2018, reference no. 0114-KDIP2-1.4010.345.2018.2.JS.

Deduction of wage costs and contributions

The possibility of assigning wage costs and contributions must take into account the application of general principles. According to Article 15(4g) the Corporate Income Tax Act claims on titles in question under Article 12(1) and 6 u.p.d.o.f.

and social security benefits paid by the undertaking of employment constitute the cost of obtaining income in the month for which they are due, provided that they have been paid or made available within the time limit resulting from the provisions of labour law, contract or other legal relationship between the parties.

In the event of a failure to comply with that time limit, those amounts shall apply Article 16(1)(57).

However, according to Article 15(4h) the Corporate Income Tax Act, contributions to claims in question Under section 4g, specified in the u.s.u.s., in the part financed by the payer of contributions, contributions to the Labour Fund and the Guaranteed Workers' Benefits Fund, subject to Article 16(1)(40), shall be the cost of obtaining revenue in the month for which these claims are due, provided that contributions are paid:

• • for claims paid or made available in the month for which they are due, within the time limit resulting from separate provisions;
• • for claims paid or made available in the following month, within the time limit resulting from the provisions of labour law, contract or other legal relationship between the party, no later than 15. the day of that month.

In the event of failure to comply with these deadlines, these contributions shall apply Article 16(1)(57a) and section 7d the Corporate Income Tax Act This may mean that, for example, remuneration for December paid indefinitely In January 2019 will not be included in the settlement of the relief 2018 – Only for 2019

Another question is whether other labour costs can be settled under the R & D relief. For example, Director of KIS in the interpretation of 24 October 2018[21] he agreed to settle as part of the relief of such costs as the costs of remuneration of employees employed to carry out R & D work or the costs of contributions to these charges, as defined in u.s.u.s., in the part financed by the contributor, but also

• training of staff employed to carry out R & D work related to carrying out this work,
• This appropriation is intended to cover the following:
• staff business trips to carry out R & D work.

We will also find a similar position in the individual interpretation of 22 May 2017[22], where it was found that ‘The same, the applicant’s position as regards the possibility of deduction in the light Article 18d(2)(1) on the basis of the tax base for the application of the R&D scheme of the remuneration paid to persons employed on the basis of a contract of employment, as well as the costs of contributions to those claims resulting from the social security rules, as well as the costs of training workers, which are related to the carrying out of research and development, and the costs of medical insurance and travel expenses of employees employed to carry out research and development work in proportion to the proportion in which these employees actually carry out research and development activities should be regarded as correct" (for comparison, the individual interpretation of the Director of National Tax Information from 17 October 2017, reference no. 0114-KDIP2-1.4010.255.2017.l.JS).

In addition, the Director of National Tax Information in an individual interpretation from 29 March 2017[23] points out that ‘The eligible costs will be the costs of basic salary, overtime, leave allowance, allowances for unused leave, bonuses and prizes, allowances for incapacity for work, severance payments, allowances for the use of a private car for business purposes, allowances and other charges for the service travel of a worker, salaries and allowances paid to staff posted from other companies in the Group, medical packages, life insurance with an insurance capital fund, as well as social security contributions as set out in u.s.u.s., in the part financed by the payer of contributions, if these charges and contributions concern workers employed for the purpose of carrying out research and development activities’[24].

Such costs for employees employed to carry out research and development work are claims on the employment relationship (derivations relate to the titles in question). Under Article 12(1) the Corporate Income Tax Act). The above claims will not include, for example, compensation for the time of illness or for the time of leave, as the Director of the CIS clearly stressed in the interpretation of 5 November 2018[25] or 31 October 2018[26].

From 2018, according to Article 18d(2)(1a) the Corporate Income Tax Act, the above-mentioned costs for persons carrying out research and development on the basis of work contracts and contract contracts shall be counted among the eligible costs. Given that the construction of this provision is analogous to Article 18d(2)(1) the Corporate Income Tax Act, it should be noted that the above conclusions of the Director of National Tax Information concerning persons employed on a contract of employment are applicable from 2018 also in this case.

This is also confirmed, for example, by the Director of National Tax Information in an individual interpretation from 8 June 2018[27], who stated that ‘It follows from the above that a corporate tax taxable person operating research and development may be classified as eligible costs of remuneration from an employment relationship as well as from a contract of order or a work contract concluded with a natural person not engaged in business activities’. The lack of possibility to take into account under the reduction of costs for contracts with persons engaged in economic activity was highlighted in the interpretation of 31 October 2018[28].

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