Starting from January 1, 2019, Poland has introduced the new rules which allow to apply a 5% income tax rate. Such preferential rate can be used also for income from computer software copyrights. Can programmers also take advantage of this preferential rate?
Who can take advantage of IP Box in Poland?
Speaking simply, IP Box is supposed to grant the right to a 5% preferential tax rate to all entrepreneurs who conduct innovative activities and meet specific conditions. The form in which such activities are conducted does not matter. IP Box can apply equally to a limited liability company or limited partnership and to a freelancer operating as a sole trader.
When can a programmer take advantage of IP Box in Poland?
A programmer can take advantage of IP Box if he/she obtains income from selling or licensing software he/she developed. The typical situation is the former, that is the sale (assignment) of rights to a software. Not all sales of rights, however, can qualify for preferential treatment.
A programmer can use IP Box if the computer software they sell is the result of research and development (R&D) work they conduct.
What are R&D activities?
R&D activities are all actions whose purpose is to increase the stock of knowledge and develop a particular domain. The Frascati manual contains the following definition:
R&D comprise creative and systematic work undertaken in order to increase the stock of knowledge – including knowledge of humankind, culture and society – and to devise new applications of available knowledge.
The field or discipline under consideration does not matter – a programmer can also conduct R&D work.
When does a programmer conduct R&D work?
Today, developing software is inherently linked to R&D work and innovation. It is important to note that software can either be the object of R&D work on its own or part of a much wider R&D process. On the other hand, in certain circumstances the R&D element may be difficult to discern.
In order for software development to be treated as R&D, the work must be aimed at eliminating scientific or technical uncertainty and advancing progress. Mere debugging will not be treated as R&D activities, and neither can writing simple applications or software using common programming languages be reckoned as such.
The Frascati manual notes that the following activities may be considered R&D:
- the development of new operating systems or languages,
- the design and implementation of new search engines based on original technologies,
- the effort to resolve conflicts within hardware or software based on the process of re‑engineering a system or a network,
- the creation of new or more efficient algorithms based on new techniques,
- the creation of new and original encryption or security techniques.
When does a programmer not engage in R&D activities?
Typical, routine programmer’s work cannot be considered R&D.
Again, the Frascati manual helpfully provides a list of programming activities not included in R&D.
Examples of activities to be excluded from R&D are:
- the development of business application software and information systems using known methods and existing software tools,
- adding user functionality to existing application programs (including basic data entry functionalities),
- the creation of websites or software using existing tools,
- the use of standard methods of encryption, security verification and data integrity testing,
- the customization of a product for a particular use, unless during this process knowledge is added that significantly improves the base program,
- routine debugging of existing systems and programs, unless this is done prior to the end of the experimental development process.
What other conditions must a programmer fulfill to take advantage of IP Box in Poland?
Merely conducting R&D activity and selling its outputs is not enough to become eligible for the 5% tax rate. It is also necessary to maintain separate accounting records designated solely to revenues and expenses related to so-called eligible intellectual property rights.
The largest practical concern related to IP Box will be the need to demonstrate that the programmer’s work involved R&D and to correctly document these activities, and the costs incurred and revenues obtained in relation thereto.
In doubtful cases, it will also be necessary to play it safe when filing for the credit by applying for a tax interpretation and objective confirmation of the nature of the work conducted. Compared to potential advantages, however, these obstacles do not appear to be too formidable. Just like it is in the case of the R&D credit, correct implementation is crucial for a successful tax return.
For more on the rules governing IP Box, read our articles:
Innovation Box in Poland – 5% income tax
If you have any questions, feel free to reach me!.