As of 1 January 2019, entrepreneurs who earn revenue from intellectual property rights will be able to benefit from the preferential 5% tax rate. The Innovation Box is to be, in addition to the R&D tax relief, another tax measure to support innovative entrepreneurs. To benefit from this solution, several conditions have to be met.
CONDITION 1 – INCOME FROM INTELLECTUAL PROPERTY RIGHTS
Pursuant to the legislation, the 5% tax rate may be applied only to income from the so-called qualifying intellectual property rights, as specified in the Act.
The qualifying rights that allow us to apply the 5% tax rate include:
- patents,
- protection right for utility model, right from registration of industrial designs or registration of topographies of integrated circuits,
- additional protection right for a patent for medical product or plant protection product,
- right from registration of medical products or authorized veterinary products,
- right from registration of varieties of plants and animal breeds,
- protected right to software.
However, it is important that these rights are created, developed or improved as part of the entrepreneur’s research and development (R&D) activities.
CONDITION 2 – DETERMINATION OF PROPORTIONS
The preferential tax rate can be applied to the so-called qualified income. This income is the product of the aggregate income from qualifying intellectual property rights and the so-called Nexus ratio.
The Nexus ratio is reckoned as follows:
Individual letters in this formula stand for costs actually incurred by the entrepreneur in respect of:
a – R&D activity carried out directly by the taxpayer in connection with the right in question;
b – acquisition of R&D results related to the right in question from an unrelated entity;
c – acquisition of R&D results related to the right in question from a related entity; and
d – acquisition of a qualifying intellectual property right by the taxpayer.
CONDITION 3 – TYPE OF AGREEMENT
The 5% tax rate may be applied to income derived from
- licence agreements,
- sale agreements,
- agreements on the sale of products or services where the price of the right in question is embedded in the sale price (fee), and
- from compensation for the violation of the aforesaid laws.
CONDITION 4 – SEPARATE ACCOUNTING RECORDS
The regulations specify how to keep accounting records in order to benefit from the preferential rate. And so, it is necessary, among other things, to separate each right in the books kept and to keep appropriate records based on which it will be possible to allocate revenues and expenses to a particular right (or a group of rights). These records should make it possible to determine the amount of income (loss) derived from a particular right.
Some of the documentation obligations are therefore the same as for the R&D relief.
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The possibility to take advantage of the 5% tax rate combined with the R&D relief offers truly measurable financial benefits!
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