Instructions for the calculation of expenditure on creative activities

Act of 26 July 1991 on income tax on natural persons (hereinafter u.p.d.o.f.) 1 points to a number of sources of revenue, and regulates revenue from so-called creative work. This revenue may be part of the income from property rights (Article 10(1)(7) u.p.d.o.f.), revenues from activities performed in person (Article 10(1)(2) u.p.d.o.f.) and income from employment relationship (Article 10(1)(1) What is the position of tax authorities and case law on the application of 50% the cost of obtaining revenue?

1. Comment

To the end 2017, which is the case law and the position of the tax authorities, the scope of application in question Article 22(9)(3) u.p.d.o.f.

was wide and included numerous manifestations of creative activity, not necessarily related to art, such as computer software writing, conducting lectures, creating articles for the press or advertising slogans. Synchronising folder under Article 22(9)(3) u.p.d.o.f. was an open directory.

It was crucial that the taxpayer’s action was ‘the track’, i.e.

subject matter of protection within the meaning of the Act of 4 February 1994 about copyright and related rights 2 (hereinafter p.a.), according to which the object of copyright is any individual creative activity, determined in any form, regardless of the value, purpose and manner of expression. Under Article 22(9) u.p.d.o.f.

indicated that in certain situations, the so-called increased cost of obtaining revenue, which is 50% revenue. Raised, 50% revenue costs were limited, the limit was 50% upper limit first tax scale range, i.e. 42,764 PLN.

By Article 1(8) point (e) 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 3 (Next: first amending act), starting with 1 January 2018 it is possible to take more account of the costs of obtaining revenue from creative activities.

These costs must not exceed the so-called tax threshold, i.e. quotas 85,528 PLN A year. On the other hand, to the legislature have limited the activities to which the regulations may apply Article 22(9)(3) u.p.d.o.f. Amendment of u.p.d.o.f.

made pursuant to first The amending law introduced a statutory catalogue of creative professions, but in the opinion of the creators and employers, this catalogue was imprecise as it did not cover fields which are also considered as creative activities, such as computer graphics. Another amendment u.p.d.o.f.

made by the Act of 15 June 2018 amending the Personal Income Tax Act, the Corporate Income Tax Act and the Flat-rate Income Tax Act on certain revenues generated by individuals (hereinafter: second Amending Act) 4 , It clarified the catalogue of creative activities now closed.

Importantly, although the amendment has entered into force 19 July 2018, but in accordance with the transitional provisions already in force since 1 January 2018

1.1. Closed catalogue of creative professions

Under the new regulations, i.e. Amendment u.p.d.o.f. via second the amending law, higher revenue costs include revenue from:

1. creative activities concerning:

• • architecture,
• • interior architecture,
• • landscape architecture,
• • construction engineering,
• • urban planning,
• • literature,
• • plastic arts,
• • industrial design,
• • music,
• • photography,
• • audiovisual and audiovisual works,
• • computer programs,
• • computer games,
• • theatre,
• • costume design,
• • scenography,
• • directing,
• • choreography,
• • artistic soldering,
• • folk art,
• • journalism;
• 2. Artistic activities in the fields of acting, stage, dance and circus art, conducting, vocals and instrumentalism;
• 3. Audiovisual and audiovisual production;
• 4. Public activities;
• 5. Museum activities in the field of exhibition, scientific, popularizing, educational and publishing;
• 6. Maintenance activities;
• 7. The subsidiary law in question under Article 2(2) p.a., for the development of a work in the form of a translation;

8. Activities:

• • R & D,
• • scientific and educational,
• • Research
• • R & D,
• • teaching if conducted in a university.

According to Article 22(9)(3) u.p.d.o.f.

increased revenue costs 50% the revenue obtained (receivables from the use of copyright by authors and performers of related rights, within the meaning of separate provisions, or the provision of such rights by them) shall apply provided that these revenues have been obtained in the course of creative activity, i.e.

in the activities listed above Under point 1-8. Such legislation by the legislator indicates that revenues should not only result from the license granted (‘the exercise of copyright’) or from the transfer of rights (‘the regulation’), but should also be linked to one of the activities listed by the legislator.

Only then do they meet the condition of applying higher revenue costs.

This restriction (to raise revenue under one of the activities listed under Article 22(9b) (u.p.d.o.f.) there is no:

1. Revenue from the payment of the creator for the transfer of ownership of the invention, topography of the integrated circuit, utility design, industrial design, trade mark or ornamental design;
2. Revenue from the licence fee for the transfer of the right to use the invention, the topography of the integrated circuit, the utility model, the industrial design, the trade mark or the ornamental design, obtained In the first year of the licence from first an entity with which a licensing agreement has been concluded;
3. Revenue from the use by authors of copyrights and performers of related rights, within the meaning of separate provisions, or their provision of those rights.

Then the cost of obtaining revenue may be 50% the revenue obtained, but may not exceed the upper limit first the tax scale range, i.e. 85,528 PLN.

In the case of revenue from the use by authors of copyright and artists/executors of related rights, within the meaning of separate provisions, or their provision of such rights, i.e. revenue listed under Article 22(9)(3) u.p.d.o.f., the cost of obtaining income shall be calculated on the basis of income less the premiums deducted by the payer in the month in question for pension and sickness insurance.

Example

The academic staff member of the university obtained income of 10,000 PLN. Income reduces pension contributions (9.76%), pension (1.5%) and disease (2.45%), i.e. Total amount 1,371 PLN (13.71% × 10,000 PLN). Revenue costs (amount to 50%) will be calculated from the amount 8,629 PLN, i.e. 10,000 PLN – 1,371 PLN. Tax revenue will then be 10,000 PLN – 1,371 PLN – 50% × 8,629 PLN, or 4,315 PLN. In conclusion, it is possible to apply 50% the cost of obtaining revenue, must be:

• 1) create the result of a work subject to copyright which is considered to be a work (according to Article 1(1) p.a.), i.e. it is externalized, is individual and bears individuality characteristics,
• 2) be a creator within the meaning of p.a. and obtain income resulting from the exercise of copyright and related rights by the creator or from the provision of such rights,
• 3) to obtain income as a result of a specific activity under Article 22(9b) u.p.d.o.f.,
• 4) maintain appropriate documentation on the works created, e.g. detailed records of copyrights transferred, and properly archive the results of creative work,
• 5) indicate in the employment contract (or civil law contract) the difference in remuneration related to the use of copyrights/ordering them (copyright honorarium) and to the performance of non-generic duties.

The most question is the form of separating part of the creator's salary for the use of copyrights/resolution of these rights.

1.1.1. Interpretations on the recognition of creative professions

The tax rules, despite the double amendment, do not remove all interpretation doubts about the application of 50% the cost of obtaining revenue. Problem in use 50% the cost of obtaining revenue is, inter alia, no statutory definitions. U.p.d.o.f. regulations define only R & D activities. According to Article 5a(38-40) u.p.d.o.f.

R & D means a creative activity involving research or development, undertaken systematically to increase knowledge resources and use knowledge resources to create new applications.

In accordance with the new sound (valid from 1 January 2018 and amended by the provisions of 3 July 2018, introducing the Act - Law on Higher Education and Science (hereinafter: Law introducing the Law on Higher Education and Science) 5 Article 5a(39)(40) u.p.d.o.f.

research is basic research within the meaning of Article 4(2) point of the Act of 20 July 2018 Law on Higher Education and Science (hereinafter: u.p.w.n.) 6 , i.e.

empirical or theoretical works aimed primarily at gaining new knowledge of the basis of phenomena and observed facts, without an attitude towards direct commercial application and application research within the meaning of Article 4(2)(2) U.S.N., i.e.

work to gain new knowledge and skills geared towards developing new products, processes or services or making significant improvements to them.

In the absence of a definition of concepts contained in tax legislation under Article 22(9) u.p.d.o.f., it may be necessary to use definitions from other branches of the law.

For example, regulations in force in the new version 1 October 2018, define development work as activities involving the acquisition, merger, formation and use of currently available knowledge and skills, including IT tools or software, for the production and design and creation of modified, improved or new products, processes or services, excluding activities involving routine and periodic changes made to them, even if such changes are of an improvement nature.

The problem is whether the u.p.d.o.f. entry allowing use 50% the revenue costs relate to the right to a registered patent or the right to register a patent. As indicated by the WSA judgment in Warsaw with 23 March 2017 7 , Article 22(9) u.p.d.o.f.

applies not only to the transfer of the property of the invention, but also to the remuneration for the transfer to another entity of rights to obtain the patent.

1. 1.2. Negative interpretations of the possibility of higher costs of obtaining revenue from creative activities

From 1 January 2018, i.e. from the date from which the provisions which entered into force began to apply 19 July 2018 and a more detailed catalogue of ‘creative’ professions, numerous interpretations as well as judgments, mostly denying payers the possibility of using increased costs to obtain revenue from creative activities.

Examples of activities are given in the table below.

Provision Article 22(9)(3) u.p.d.o.f. is the lex specialis in relation to the general cost-setting principle for obtaining the income from the employment relationship indicated under Article 22(2) u.p.d.o.f. Therefore, only if it is clearly established that a given income is covered by copyright will it be possible to apply increased revenue costs.

1.2. Counting rules 50% revenue costs

The limit of increased revenue costs is cumulative (i.e. it applies to all the revenue in question in total) under Article 22(9)(3) u.p.d.o.f.), in turn in connection with the collection of advances each payer (if more) uses a separate limit. Thus, when setting the amount of tax to be paid, the payer will apply the full amount of the limit.

Example

Jan Kowalski is the author of historical novels. He received a salary from publishing house X for the transfer of copyright to his novel in the amount 140,000 PLN. Jan Kowalski also received a salary from Y-release for transferring copyright to another novel in the amount 60,000 PLN.

The X-Publisher will apply the rate 50% the cost of obtaining revenue in relation to the total remuneration paid in the amount of 140,000 PLN (then the cost of obtaining revenue, assuming that no social security is paid, will be 70,000 PLN and fit in the statutory limit).

In the light of the above, the publishing house will pay a tax of: 18% × 70,000 PLN, i.e. 12,600 PLN (Assuming that the publishing house, when calculating the tax, does not take into account the tax-free amount).

Y-release will also apply the rate 50% the cost of obtaining revenue in relation to the total remuneration paid in the amount of 60,000 PLN (revenue costs 30,000 PLN).

Y as a payer will pay tax in the amount of: 18% × 30,000 PLN, i.e. 5,400 PLN. Thus, the total tax paid by the payers by Jan Kowalski will be 18,000 PLN.

However, in the annual statement, Jan Kowalski will be able to demonstrate the costs of obtaining revenue in the maximum amount 85,528 PLN, the tax paid by the payers was understated. Jan Kowalski will have to pay corporation tax. The tax to be paid will be (as calculated):

1. income: (140,000 PLN + 60,000 PLN) – 85,528 PLN = 114,471 PLN (Jan Kowalski can count down to the maximum 85,528 PLN costs, unless it proves, on the basis of the relevant documents, that the revenue costs incurred are in fact higher than those applied 50% the cost of obtaining revenue;
2. tax (without deduction of the tax-free amount): 15,395.04 PLN + 32% surplus over 85,528 PLN, i.e.: 15,395.04 PLN + 32% × (114,471 PLN – 85,528 PLN), i.e. 24,656.8 PLN;
3. tax-free amount (for the basis for calculating the tax above 85,528 PLN and not exceeding the amount 127,000 PLN): 556.02 – 556.02 × (114,471 PLN – 85,528 PLN) ÷ 41,472 PLN, i.e. 167.98 PLN;
4. tax payable: 24,656.8 – 167.98 = 24,489 PLN. The tax paid by payers was 18,000 PLN, Jan Kowalski will therefore have to pay 6,489 PLN tax.

The limit of increased revenue costs applies to all employee income obtained from all titles, to all employers (or payers). Each payer applies a separate limit to the collection of advances within a year, so the employee may, after exceeding his limit, make a declaration to employers/ principals that he does not apply the increased cost of obtaining income from the date indicated in the statement.

If an entity employs a number of employees each month, each of whom produces multiple works, and the entity is not then able to value individual works, then the employees may account for creative work in the form of a lump sum, in a fixed amount. In such a case, the entity should keep track records and pay a flat-rate only when the work is created and transferred. Once these conditions are met, revenue costs can be used.

Among the tasks of the payer is to decide whether it is appropriate to charge 50% the cost of obtaining revenue.

According to Article 30(1) and Article 31 Act on 29 August 1997 - Tax Ordinance 8 , whether the work performed under the contract of employment is the subject of copyright is the obligation of the payer to pay the benefits for this purpose. The payer is also responsible for incorrect application of the increased revenue costs 9 .

Importantly, if the creator can prove that in his case the real cost of obtaining revenue was higher than statutory 50%, if they have the right to accept them as costs actually incurred, even if they exceed the amount of the statutory limit 50% (Article 22(10)(10a) However, the actual costs of obtaining income can only be used by the taxpayer in the annual tax return, since the payers at the stage of determining the advance on the remuneration of the creators during the year were not entitled to this by the legislator.

1.3. Declarations and information on revenue obtained by the creators

In the Annual Declaration (form PIT-4R) the revenue tax advances collected should also be included in the advance payments related to the remuneration paid to the creators in the tax year.

These advances are shown in Part C Under point 1 „Advances on tax calculated by the payers in question under Article 31 and Article 42e(1) Laws, on revenue listed in those provisions’, under heading 9-32.

In the case of contractors, the advance paid shall be shown in Part C Under point 7 „Advances on the tax collected on the performance benefits of the specified activity. 13 points 2 and 4-9 and Article 18 Laws’, under 93-104.

In the form PIT-11 information on income, income and personal income tax advances collected, including creative activities, should be included. Revenue from creative activities, related to the application of increased revenue costs, on the basis of Article 22(9)(3) u.p.d.o.f., is shown in Part E under heading 29 including heading 34.

Where the increased cost of obtaining revenue from creative activities is not applied, only the item shall be filled in 29, a position 34 leave it unfilled. If in a given year the employee exceeds the increase in income costs (i.e.

one employer), then the payer shows in position 34 only the amounts of revenue generated by the employee in question by that payer for which the total cost of obtaining revenue did not exceed the limit.

If, on the other hand, an employee makes a declaration during the year in which he requests no increased copyright costs from the month following the month of submission of the declaration (e.g.

in connection with the receipt of such revenues from another payer), the amounts in accordance with the declaration shall be entered only under the heading 29.

If the increased cost of obtaining revenue relates to the remuneration of the creators obtained under the contract of order or work, it should be shown in items respectively 49 and 50. Where the contract for a work is concluded at a one-off rate of less than or equal to 200 PLN and collected flat-rate tax (without taking into account the cost of obtaining revenue), then there is no obligation to issue PIT-11, and information on the collection of flat-rate tax shall be provided in print PIT-8AR.

Limit 200 PLN for the benefit of simplification concerns a specific contract, not the sum of contracts during a year or even a month. Values of revenue and costs shown under headings: 29, 30, 34, 35, 49 and 50 not rounded to full gold.

2. Explanations for the instruction pattern

Introduction of tax instructions for use 50% the cost of obtaining revenue will allow to make up-to-date application arrangements 50% the cost of obtaining revenue from creators. This will both contribute to more efficient tax returns and prevent possible irregularities in the cost of obtaining revenue.

2.1. Responsible persons

If income is incorrectly classified and the cost of obtaining income is wrongly applied, the liability is borne by the taxpayer (the person who wrongly showed 50% revenue costs).

2.2. Objective

The purpose of the instructions is to facilitate the classification of revenue costs for creative activities and the correct application of the rate 50% the cost of obtaining revenue.

2.3. Procedures

The taxpayer, when determining the amount of the cost of obtaining revenue, decides whether a higher rate, i.e. 50%.

The application of this rate is possible both in the case of a work contract and in the case of a contract of employment, but the mere conclusion of a work contract does not make it possible to apply the rate for tax purposes 50% the cost of obtaining revenue.

It is possible to apply an increased cost rate for obtaining revenue after careful analysis of each single case where remuneration for so-called creative work occurs.

2.4. Time limits

Introduction of instructions from 1 January 2018 facilitate decision-making on increased use 50% revenue cost rates.

2.5. Storage of documents

The period of storage of instructions is not specified by law. In principle, the instructions shall be kept in accordance with the limitation period for tax obligations. It is worth storing until 5 years after the end of the tax year in which the application took place 50% revenue cost rates.

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1 i.e. Journal of Laws of 2018, item 1509.

2 i.e. Journal of Laws of 2018, item 1191.

3 Journal of Laws of 2017, item 2175.

4 Journal of Laws of 2018, item 1291.

5 Journal of Laws of 2018, item 1669

6 i.e. Journal of Laws of 2018, item 1668.

7 reference no. III SA/Wa 794/16, Legalis.

8 i.e. Journal of Laws of 2018, item 800.

9 As confirmed by the Director of KIS in an individual interpretation of 10 May 2017, reference no. 1462-IPPB2.4511.65.2017.2.MM, Legalis. [5] Journal of Laws of 2018, item 1669.