Relief from R & D . Changes, new guidelines and application practice

The R & D relief operates in tax law from 1 January 2016 In economic terms, the relief mechanism consists of double deduction of expenditure: once first by crediting it with revenue costs, for the time being second – as a reducing tax base. R & D relief is not tax optimization. Like any tax relief is a structural element of the tax.

Moreover, the use of R & D relief alone is not subject to reporting under MDR rules. The reporting obligation could only occur if the conditions for considering the arrangement as a tax scheme were met.[1].

1. Introduction

The R & D relief replaced the so-called relief for the acquisition of new technologies. The comparison of them best illustrates the philosophy that guided the legislature introducing R & D relief.

In accordance with the provisions on the reduction of the acquisition of new technologies, it involved innovation which has not been applied in the world for more than the last period 5 years (see Article 26c(2) Act on 15 February 1992 on corporate income tax 2 , Next: the Corporate Income Tax Act, as follows: 31 December 2015).

In the case of R & D relief, there is no such requirement. Furthermore, the innovation created by the taxpayer does not need to be compared with innovation created by other entrepreneurs (both domestic and foreign). Innovation is assessed within a given company.

The provisions on R & D relief also contain no requirements for commercialisation of development results. It will be up to the taxpayer to decide whether to sell them, grant licences or use them in his company.

2. Research and development

According to Article 18d(1) the Corporate Income Tax Act the taxable person receiving income other than capital gains deducts from the tax base, determined in accordance with Article 18, the cost of obtaining revenue incurred for research and development 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. CIT taxpayers can settle the R & D relief in a revenue source that is not capital gains. They do not have to do business in this regard.

For example, associations which only carry out statutory activities may benefit from the relief. In such a case, the reduction will reduce the tax base in which income has not been exempt.

According to Article 26e(1) Act on 26 July 1991 on personal income tax[3] (hereinafter: u.p.d.o.f.) a taxable person obtaining revenue from a specified source under Article 10(1)(3) deducts from the basis of the calculation of the tax determined in accordance with Article 26(1) or Article 30c(2), the cost of obtaining revenue incurred for research and development.

The amount of the deduction may not exceed in the tax year the amount of income obtained by the taxable person from the source specified under Article 10(1)(3) u.p.d.o.f. PIT taxpayers can settle the relief only in the source of income, which is economic activity. The clear appeal by Article 26e(1) u.p.d.o.f.

for regulation included under Article 10(1)(3) u.p.d.o.f. (business income).

Other provisions resulting from the Corporate Income Tax Act and with u.p.d.o.f. are identical. They indicate that under the R & D reduction, the costs of obtaining eligible revenues incurred for R & D activities are deductible. The main issues to be resolved are:

• 1) what R & D is and
• 2) what expenditure may be considered eligible costs?

According to Article 5a(38) u.p.d.o.f. (Article 4a(26) the Corporate Income Tax Act) R & D is a creative activity involving research or development undertaken systematically to increase knowledge resources and use these resources to create new applications.

We can talk about research and development when the following cumulative conditions are met:

• 1) the activities are carried out in research or development,
• 2) the activity is creative,
• 3) the work is carried out systematically,
• 4) the work is carried out for a specific purpose – increasing knowledge resources or using them to create new applications.

Tax explanations of the Minister of Finance from 15 July 2019, on preferential taxation of income generated by intellectual property rights – IP BOX 4

The use by the legislator of a ‘or’ consistency means that the taxpayer may carry out research and development together, only research or development.

For comparison, the definition of R & D from the Frascati Manual 2015 „Recommendations for the collection and presentation of data on research and development activities" 5 uses a ‘i’ interface between research and development.

This means that the concept of “research and development” in accordance with this Manual includes three activities: basic research, applied research and development, and therefore development work must always be linked to scientific research.

Regulations of the European Parliament and of the Council and the Corporate Income Tax Act they do not contain the requirement contained in the Frascati Manual, and are therefore much more favourable for taxpayers wishing to benefit from the relief.

MF explanations on IP BOX 6

The characteristic of creativity is always connected with the activity of a man of a creative character. The message of creation will be fulfilled if the aim is to create a new intellectual creation.

Creative activity is an activity whose result (showing) of such action, even though it is minimally different from other results of the same action, and therefore has a feature of novelty, the degree of which does not matter.

For the purposes of research and development, to the minimum extent, creative activity on the scale of the company is sufficient, i.e.

the entrepreneur in his own right (in the framework of research and development) develops new or improved products, processes, services, even if a similar solution has already been developed by another entity.

Therefore, the development of R & D may be characterised by the development of new concepts, tools, solutions not yet existing in the economic practice of the taxpayer or so innovative that they differ significantly from those already in place with the taxpayer.

In the personal interpretation of the Director of KIS from 11 February 2019 7 it is pointed out that tax authorities recognise creative activities as measures aimed at developing or using available knowledge resources to create new or substantially modified products, processes and services.

The work carried out should require a creative approach, should not be carried out on schemes, but each time require conceptual solutions to enable the project to be implemented. The creative nature of the works is also confirmed by the fact that the result of the actions is subjectively new intellectual products.

MF explanations on IP BOX 8

The systematic conduct of work means the conduct of business in an orderly manner, according to a certain system. Systematic activity is a methodological, structured and structured activity.

R & D activities are carried out systematically, regardless of whether the taxpayer constantly carries out research and development work, or only from time to time or even occasionally, as a result of the nature of its activities and the needs of the market, customers, micro and macroeconomic situations.

It is sufficient for the taxpayer to plan and carry out at least one a research and development project, adopting specific objectives for it to achieve, timetable and resources. Such activities may be regarded as systematic activities, i.e. conducted in a methodical, structured and orderly manner.

The tax authorities recognise as a systematic activity the activity in which something is done regularly and carefully and, in the case of orderly activities, according to a certain system.

This concept must be understood not only to carry out ongoing research and development work initiated in the past, but also to start a business in this area, assuming that the taxpayer plans to do such work in the future. These works should be characterised by appropriate regularity.

This means that the taxpayer is excluded from the scope of the research and development activities of the taxpayer and that the taxpayer must seek out such activities, which are conducted in an orderly and regular manner.

Research and development should also be carried out with one or two objectives: to increase knowledge resources (research) or to use these resources to create new applications (development work). Tax laws on the definition of research and development work refer to the law from 27 July 2005 Higher education law 9 (Further: p.w.). According to Article 4(2) Research is an activity involving:

• 1) basic research, understood as empirical or theoretical works, aimed primarily at gaining new knowledge of the foundations of phenomena and observed facts, without a direct commercial application;
• 2) application research, understood as work to gain new knowledge and skills, geared towards developing new products, processes or services or making significant improvements to them.

In turn, according to Article 4(3) Development work is an activity involving the acquisition, merger, formation and use of currently available knowledge and skills, including information tools or software, for the planning of 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.

Individual interpretation of the Director of KIS from 14 December 2018 10

Development work is the work of combining research results with technical knowledge to introduce a new or upgraded product, new technology or new organisation system into production.

In other words, systematic work is based on existing knowledge gained from research activities and/or practical experience and aims to produce new materials, products or equipment, to initiate new ones and to significantly improve existing processes, systems and services.

Economic operators involved in R & D activities carry it out alongside their core activities (e.g.

industrial enterprises with their own R & D facilities, laboratories, R & D establishments and centres, research and technology departments, construction and technology offices, technology development facilities, study and project offices, etc.).

Development work may include the acquisition, merger, shaping and use of currently available knowledge and skills, including IT tools or software, for production planning and design and creation of modified, improved or new products, processes or services.

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.

In individual interpretations so far issued, development work was considered to include:

• 1) work to develop technologies for new products and services,
• 2) work to develop the composition of new products,
• 3) work to develop quality control of new products/services,
• 4) modification of production processes to increase their efficiency,
• 5) adaptation of products, services and processes to specific customer needs,
• 6) development of new applications for products and services,
• 7) search for appropriate technologies and work on their usefulness to create innovative solutions;
• 8) search for applications of new research results and other knowledge.
• 3. Eligible costs

The use of the R & D allowance will in practice consist in reducing the tax base by the sum of the eligible costs incurred by the taxpayer. The eligible costs must comply with the following conditions in order to be recognised as such:

• 1) have been incurred by the taxpayer for research and development activities,
• 2) provided the taxpayer with the cost of obtaining revenue,
• 3) are located in a closed catalogue of eligible costs, as laid down in the regulations,
• 4) 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 within the meaning of separate provisions,
• 5) in the accounts, the taxable person has distinguished the eligible costs,
• 6) have been shown by the taxable person in the tax return,
• 7) have not exceeded the limits of the provisions laid down,
• 8) have not been reimbursed to the taxpayer in any form or have not been deducted from the income tax base.

According to Article 26e(2)(3) u.p.d.o.f. (Article 18d(2)(3) the Corporate Income Tax Act) The following shall be considered eligible costs:

1. receivable in respect of the titles in question during the month in question under Article 12(1) u.p.d.o.f., and the contributions for these debts financed by the payer as laid down in the Act of 13 October 1998 on the social security system 11 (hereinafter: u.s.u.s.) in so far as the time allocated for the implementation of research and development activities remains at the overall working time of the employee in that month;
2. 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 contributions from the payer in respect of those charges as set out in u.s.u.s., 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;
3. the acquisition of materials and raw materials directly related to the R & D activities carried out;
4. the acquisition of non-permanent specialised equipment used directly in research and development activities, in particular vessels and laboratory equipment and measuring equipment;
5. expertise, opinions, advisory services and equivalent services provided or performed under contract by the entity concerned under Article 7(1)(1), 2 and 4-8 P.S., as well as the acquisition of the results of his research for R & D from such an entity;
6. the payment of the use of research equipment used exclusively for research and development activities, if this use does not result from an agreement concluded with an entity affiliated to a taxpayer within the meaning of Article 11a(1)(4) the Corporate Income Tax Act;
7. the acquisition of a service for the use of research equipment only for the purpose of research and development activities, where the purchase of the service does not result from a contract concluded with an entity affiliated to a taxpayer within the meaning of Article 11a(1)(4) the Corporate Income Tax Act;
8. the costs of obtaining and maintaining a patent, the protection rights of a utility model, the rights of registration of an industrial design, incurred on:

(a) preparation of the application documentation and submission of the application to the Patent Office of the Republic of Poland or the relevant foreign body, including the costs of required translations into a foreign language,

(b) the conduct of proceedings by the Patent Office of the Republic of Poland or the relevant foreign body, incurred from the time of notification to those authorities, in particular official fees and the costs of legal and procedural representation,

(c) to reject the allegations of non-compliance with the conditions required to obtain a patent, a protective right to a utility model or a right to register an industrial design both in the application procedure and after its completion, in particular the costs of legal and procedural representation, both in the Patent Office of the Republic of Poland and in the relevant foreign body,

(d) periodic charges, renewal fees, translations and other activities necessary to grant or maintain the validity of a patent, a design protection right and the registration of an industrial design, in particular the costs of validating a European patent;

1. made during a given tax year, included in the cost of obtaining revenue, depreciation off fixed assets and intangible assets used in research and development activities, excluding passenger cars, structures, buildings and premises which are separately owned.

This list of expenditure which may be considered eligible shall be closed. This means that only expenditure which the taxpayer is able to allocate to one of this kind of cost, will be eligible. The most problematic issue on the basis of the inclusion of expenditure in eligible costs is the expenditure on salaries (in practice, they are around 80% all eligible costs shown by tax payers). Some tax authorities present the view that expenditure on sickness pay and pay for leave cannot constitute eligible costs.

The individual interpretation of the IS Director from 13 March 2020 12

In cases where a worker does not perform R & D activities while on sick leave or on leave, and in the course of his/her employment, he/she received, among other things, a salary for the duration of leave and other justified absences, it is appropriate to separate this part of the salary and benefits paid to R & D workers, as well as contributions from those entitlements.

A completely different position is presented in the case law.

In the judgment of 20 February 2020 13 The WSA in Gliwice, citing a line of case law in this respect, pointed out that there is no reason to exclude from the R & D relief the income of the employee (who is engaged in research and development) received when he does not provide work due to leave, illness or any other justified absence.

A frequent mistake made by taxpayers is to include the eligible costs of salaries paid to persons employed under B2B contracts. Such expenditure will not constitute eligible costs. The position of tax authorities and the case law are consistent in this respect.

Individual interpretation of the Director of KIS from 5 October 2018 14

Nor may expenditure on the remuneration of subcontractors carrying out their own economic activities acquired for the purpose of carrying out research and development activities be deducted. As indicated in the above - called Article 26e(2)(1)(2), Only employees' remuneration and contract remuneration or work in parts related to research and development shall be deducted.

Significantly, expenditure on salaries of workers employed for research and development and for other purposes should be included in the eligible costs proportionately. In this case, the eligible cost will be the product of the employee's ratio of proportion and remuneration together with the contributions of ZUS payer in a given month. The proportion ratio should, on the other hand, be calculated as the ratio of the employee's working time devoted to R & D work to the total of his working time in a given month.

Example

A full - time worker has devoted In March 2020 50 hours for research and development. The employee's gross salary is 6,400 PLN A month.

In the first stage we calculate the ratio: 50/176 = 28%,

where:

• 50 – the number of working hours per month devoted to research and development,
• 176 – the total working hours per month resulting from the working time,
• 28% – the ratio according to which the remuneration of the employee and the contribution of the Social Security Fund of the employer will be included in the eligible costs.

In the second the stage is calculated in which part of the employee's salary and contributions paid by the payer constitute eligible cost (data in PLN):

In the above example, the amount 2,113.06 PLN will be the eligible cost. The calculation does not take into account contributions to the Labour Fund and the Guaranteed Workers' Benefits Fund, which in no circumstances will be at the expense of qualified.

4. Deduction rules and accounting aspects

The R & D relief is available to CIT taxpayers who provide tax returns CIT-8, and PIT taxpayers who provide tax returns PIT-36 and PIT-36L. The relief shall be settled In the Annex to the CIT/BR or PIT tax return/this year This annex only serves to clear R & D relief.

It shall indicate all eligible costs incurred in a given tax year and then transfer them to the tax return, to the item where the tax reduction amounts are recognised. The provisions provide for the settlement of the R & D relief only in the annual statement.

This means that the eligible costs incurred cannot be taken into account for the calculation of income tax advances.

The exception in this respect was introduced by Law of 31 March 2020 amending the Act on Special Solutions for Prevention, Prevention and Control COVID-19, other infectious diseases and their emergency situations and certain other laws 15 (hereinafter: UCOVIDzm). According to it, the eligible costs incurred In 2020 for research and development, the aim of which is to develop the products needed to counter COVID-19, referred to under Article 2(2) uCOVIDzm, the taxable person may also deduct from the income on which the advance is calculated under Article 25(1) or (1b), during the tax year which:

• 1) started before 1 January 2020, and finish after 31 December 2019 or
• 2) started after 31 December 2019, and finish before 1 January 2021

Example

Tax payer In March 2020 began research and development, which aims to develop a new type of breathing mask with a filter that effectively inhibits viruses contained in the air. This product satisfies the conditions for its recognition as necessary to prevent the spread of an infectious disease in humans caused by viruses.

The taxpayer, bearing eligible costs, e.g. in the form of employee remuneration expenses and the purchase of materials and raw materials, will have the right to include them in the calculation of income tax advance payments.

Where a taxable person has suffered a loss or income for a tax year lower than the amount of deductions due to him, the taxable person shall be entitled to deduct in subsequent tax returns, in full or in the rest of the year, respectively.

six the tax years immediately following the year in which the taxpayer benefited or was entitled to benefit from the deduction. The rules also provide for a mechanism to settle the relief in the form of a so-called cash refund.

However, only newly created taxpayers can benefit from this procedure, only In the first and second the year of its activity. This excluded the possibility of applying a refund mechanism to taxable persons who are de facto not new taxable persons (e.g. arising from conversion, merger or division).

A taxpayer benefiting from a cash refund shall be entitled to an amount corresponding to the product of the eligible costs incurred but not deducted and the rate of tax applicable to that taxpayer in the tax year in question.

This is due to Article 1(2), Article 4, Article 8 Act on 30 August 2019 amending the Income Tax Act on individuals and certain other laws[16].

The legislator imposed on taxable persons benefiting from the R & D relief the obligation to keep accounting records in such a way that it could distinguish the eligible costs incurred.

If the taxpayer keeps a book of revenues and expenses, as explained in the tax statement of revenues and expenses, column 16 is intended to record the costs of the research and development activities in question under Article 26e u.p.d.o.f. After the end of the year, these costs should be added up.

This column should include all eligible costs of R & D activities, regardless of how much they will be deducted from the tax base.

In the case of accounts, it is up to the head of the unit to decide how the eligible costs are to be recognised. It is sufficient to take off-balance-sheet accounts. This is also widely accepted by tax authorities. Tax rules do not specify the requirements for the way in which the costs of R & D are distinguished.

At the same time, according to Article 16(1) Act on 29 September 1994 on accounting 17 (Further: u.o.r.) the supporting books accounts contain records that are an detail and complement the records of the master books.

‘It is carried out in a systematic manner as a separate system of books, files (account sets), computer data sets, agreed with balances and records in the main book accounts.

Consequently, it is sufficient for the costs of research and development to be distinguished from those for which the taxpayer intends to benefit from the tax credit in a separate supporting record.’ 18 .

It is therefore sufficient to create an additional synthetic account of the Groups in ZPK 9 – R & D costs at which only development costs will be recorded during the year (financial period). To this synthetic account, analytical accounts should be created by type of eligible costs incurred:

• 1) remuneration of employees/contractors/contractors,
• 2) costs of materials and raw materials,
• 3) depreciation off from the initial value of fixed assets and intangible assets,
• 4) the cost of expertise, opinions, advisory services, research results used for R & D activities,
• 5) expenditure on the use of scientific and research equipment,
• 6) the costs of obtaining and maintaining a patent, the protection rights of a utility model, the rights of registration of an industrial design used for R & D activities.
• 5. Documentation

The tax laws do not explicitly require additional records and documentation to be kept for R & D relief purposes. However, records and documentation should be prepared for evidence purposes. To this end:

1. the policy of the taxpayer to carry out research and development activities aimed at:

(a) ensuring that the taxpayer conducts R & D activities efficiently, efficiently and lawfully,

(b) clearly defining the roles and tasks of the participants involved in research and development; and

(c) ensuring the efficient use of resources in research and development activities;

1. a resolution on the establishment of a department/research and development team – this document will determine which persons will participate in research and development;
2. the rules of division/R & D team, specifying the activities, tasks and organisation of the department's work;
3. The Project Charter (in case of settlement of the R & D relief in the design formula) specifying and describing the individual stages of the implementation of the R & D project;
4. Worktime records. This is one of the most important documents, since in most cases the largest amount of eligible costs is expenditure on remuneration of employees, contractors and contractors. The provisions require proportional inclusion in the eligible costs of these expenditure where workers, contractors, contractors of the work participate in research and development and perform other activities, not included in research and development. The working time records are intended to indicate the actual working time devoted to research and development and the share of this working time at the general working time of the employee, the contractor, the contractor of the work in a given month.
5. Summary

Although the R & D relief functions in tax law from five years, it is still used by taxpayers to a negligible extent. For example, according to MF data In 2018 has benefited from the R & D relief 948 CIT taxpayers for their total number 507,000.

Following recent amendments to the legislation, the R & D relief has become even more attractive and its implementation is simple.

The legislator has thus changed the terms of this tax credit so that as many R & D taxable persons as possible benefit from it, especially since the tax incentives used so far in this respect are considered ineffective.

At the same time, it should be noted that existing legal solutions continue to discriminate against taxpayers who generate income from non-agricultural economic activities and pay income tax in the form of a lump sum on recorded income.

This means that the legislator presupposes that the above-mentioned entrepreneurs are not engaged in innovative activities and therefore did not foresee that they could benefit from this tax preferences. It is difficult to find reasonable reasons for this.

The choice of the form of taxation of business income does not in any way prejudge its innovation. Therefore, it is appropriate to amend the provisions on relief to include the above mentioned entrepreneurs.[19].

_____________________________

1 Cf. tax explanations of the Minister of Finance 31 January 2019 – information on tax schemes.

4 Tax explanations of the Minister of Finance from 15 July 2019, on preferential taxation of income generated by intellectual property rights — IP BOX (hereinafter: MF's IP BOX clarifications), p. 10.

5 Standard for statistical research of the R & D sphere.

6 MF explanations on IP BOX, op. cit., p. 12.

7 reference no. 0111-KDIB1-3.4010.608.2018.2.BM, Legalis.

8 MF explanations on IP BOX, op. cit., p. 14.

9 Journal of Laws of 2017, item 2183.

10 reference no. 0114-KDIP2-1.4010.415.2018.2.JS, Legalis.

12 reference no. 0114-KDIP2-1.4010.550.2019.2.JF.

13 reference no. I SA/Gl 1323/19, Legalis.

14 reference no. 0114-KDIP3-1.4011.377.2018.2.ES, Legalis.

16 Journal of Laws of 2019, item 1835.

18 Individual interpretation of the IS Director in Poznań with 26 January 2017, reference no. 3063-ILPB2.4510.265.2016.1.AO, Legalis.

19 R. Zieliński, R & D relief as an instrument for the development of entrepreneurs in Poland, Annales Universitatis Mariae Curie-Sklodowska 2017, Sectio H, p. 532.

The article comes from the book “Changes in Taxes and Accounting 2020 taking into account the anti-crisis shield" under the ed. prof. adjunct. dr. hab. Artur Hołda, published by C.H. Beck Publishing House: https://www.ksiegarnia.beck.pl/19149-zmiany-w -tax-and-account-2020-with-including-disc-anti-crisis-artur-hold