Claiming the IP Box in the video game industry

The instrument popularly known as the “IP Box,” introduced on 1 January 2019, allows taxpayers to claim a lower, 5% rate of corporate income tax or personal income tax in their annual tax settlements for income generated from commercialisation of qualified intellectual property rights they have created or developed through R&D activity. In this article we discuss how to benefit from the IP Box in the game development industry, who is eligible for the IP Box, and the conditions that must be met.

CIT and PIT payers

Because the IP Box is available to CIT and PIT payers, a
preferential income tax rate may be claimed by taxpayers operating in corporate
form (CIT payers) or natural persons operating a business (such as freelance
programmers). This option is equally available to taxpayers operating in any
branch of the economy. The practice of the tax authorities confirms that beneficiaries
of the IP Box may include, for example, individuals entering into cooperation
agreements on a B2B basis.

conditions for use of the IP Box

The IP
Box, and thus the 5% income tax rate, is available when all three of the
following conditions are met:

  • The
    taxpayer earns income from commercialisation of statutorily defined qualified
    intellectual property rights
    (QIPR), which also
    include copyrights to software. (Also earning income from other sources does
    not prevent use of the IP Box.)
  • The subject of protection of rights qualifying for the
    IP Box (e.g. software) was created, developed or improved by the taxpayer as
    part of research and development activity conducted by the taxpayer (R&D).
  • The taxpayer maintains the statutorily required
    records in a manner enabling determination of revenue, tax-deductible costs,
    and net income (or loss)—in other words, in practice, enabling determination of
    taxable income (or tax loss).

Claiming of the IP Box in the annual
CIT or PIT return

The preferential (5%) rate of
income tax is not applicable with respect to current settlements of CIT or PIT
(in particular, it is not reflected for purposes of calculating monthly or
quarterly income tax advances), but may be claimed after the end of the tax
year in calculating the annual tax obligation and filing the annual tax return.
Thus, potentially the IP Box may be claimed for prior years for which the CIT
or PIT obligation has not become time-barred (up to and including 2019, when
the IP Box entered into force), so long as the statutory conditions are met. (In
practice it may prove problematic to meet the condition of maintaining the
appropriate records, as the tax authorities require the records to be
maintained on a current basis.)

Condition 1: income originating in qualified rights

A taxpayer, including one operating
in the video game sector, may enjoy a preferential rate of CIT or PIT for
income from commercialisation of QIPRs. The category of QIPRs includes rights to:

  • Patents
  • Utility models
  • Industrial designs
  • Layout designs (topographies)
    of integrated circuits
  • Supplementary protection
    rights to products for medicinal products or plant protection products
  • Medicinal products and
    veterinary medicinal products authorised for trading
  • Protected plant varieties
  • Copyright to computer programs

to protection under separate acts or ratified international agreements to which
the Republic of Poland is a party, or other international agreements to which the
European Union is a party.

To benefit from the preferential rate, it is sufficient to generate income
from any one of the foregoing QIPRs. In the case of the video game industry in
Poland, the most common QIPR is
copyright to computer programs. But in other places, such as the US and Asia,
the commonly employed form for protection of software is patent (which may be
significant for entities planning expansion onto foreign markets). Rights obtained abroad
protecting computer programs should also be reflected for purposes of the IP
Box under the same rules as rights obtained in Poland, so long as they are
subject to protection under statutes or international agreements to which
Poland or the EU is a party.

taxpayers from the video game industry may claim the IP Box for income from the
transfer of economic copyrights to computer programs or grant of licences to
such programs. The IP Box may also be applied to income from the sale of goods
or services whose price reflects the price of copyright to computer programs or
damages for infringement of such rights (e.g. obtained as a result of copying
or elaboration of a program by a third party).

Use of the preferential income tax rate in the IP Box applies to
independently created computer programs. Doubts may arise in situation where
the taxpayer elaborates or improves existing programs written by others,
without acquiring the copyright or an exclusive licence from the owner (e.g. when
software is used based on a nonexclusive licence for elaboration or improvement).
It should be noted, however, that individual tax interpretations have been
issued in which the tax authorities did not object to claiming of the IP Box by
taxpayers hired by the holder of the copyright to modify or improve programs (e.g.
individual interpretation by the director of the National Revenue
Administration Information Centre of 20 November 2019, no. 0113-KDIPT2-1.4011.492.2019.1.KO).

Thus it is vital for the possibility of applying the IP Box to analyse
contracts with clients and programmers cooperating in a B2B model concerning the
basis for mutual settlements and costs connected with the computer program.

Another fundamental issue for the possibility of claiming IP Box relief by
the video game industry is the interpretation of the notion of “copyright to a
computer program.” A computer program is subject to
copyright protection if it manifests creative activity of an individual nature. In practice, protection
extends to the program’s source code. Nonetheless, a video game is designed to
be used as a whole, and thus for tax purposes may be assessed as single
(consolidated) work. Creative activities carried out during the process of
developing a game include combining, adjusting and interaction of all elements
making up the game, so that they ultimately achieve the effect of a single
product as intended by the team of developers. Thus we could refer to a specific
integration within a video game of such elements as source code, output code,
instructions, description of operating procedures, dialogue track, and graphics.

should also be noted that a computer program may be incomplete, or even contain
certain errors or gaps. Pre-alpha, alpha and beta versions, test or demo
issues, are also computer programs, and thus may constitute QIPRs for purposes
of the IP Box (so long as they meet the conditions for being regarded as a work).

Condition 2: creation of
rights in R&D

The subject of protection of
commercialised QIPR must be created, elaborated or improved by the taxpayer as
part of its own R&D activity.

R&D activity is not a
subjective category, i.e. it is not necessary for the taxpayer applying the IP
Box to hold the status of an R&D centre or other subjective
characteristics. Nor does the taxpayer have to qualify for R&D relief under
the CIT Act or the PIT Act (which is a separate instrument from the IP Box).
What is relevant is the objective aspect of the taxpayer’s activity.

R&D activity is defined as creative and systematic
work, including scientific research and experimental development, undertaken in
order to increase the stock of knowledge and to devise new applications of
available knowledge.

The peculiarities of operations in the video game industry (as in IT as a
whole) leading to introduction of innovations, mainly involving work whose
results are intangible, generate difficulties in identifying which operations
constitute R&D activity and which are ordinary activities of a
non-innovative nature. To determine whether particular activities may be
classified as R&D work, the definition adopted by the OECD in the “Frascati
Manual” may be helpful. According to the manual, R&D may cover processing
of information in new fields, such as the development of new operating systems
or languages, as well as development of new applications or significant
upgrades of existing operating systems and application programs.

Frascati Manual also provides examples of activities not regarded as R&D.
These are routine activities not embodying scientific or technological advances
or eliminating technological uncertainty. Thus the following, for example, are
not regarded as R&D:

  • Development of business application software and information systems using known methods and existing software tools
  • Creation of websites or software using existing tools
  • Use of standard methods of encryption, security verification and data integrity testing
  • Customisation of a product for a particular use, unless during this process knowledge is added that significantly improves the base program
  • Adding user functionality to existing application programs
  • Routine debugging of existing systems and programs.

Consequently, any research work in
the IT industry, including the video game sector, whose aim is not routine
activity but generally technological progress and growth of the field, should
be deemed to be work qualifying as R&D.

Development work is defined as acquiring,
combining and exploiting currently available knowledge and skills from the
field of science, technology and commerce, as well as other knowledge and
skills, for planning of production, as well as creating and designing new,
modified or improved products, processes and services.

To meet the conditions of the
IP Box, R&D work on a project must be systematic. The most appropriate
definition of the systematic nature of the work refers to conducting activity
in an orderly fashion, according to a certain system, methodical and planned. Significantly,
for work to be systematic, the continuity of the activity is not essential, nor
is the length of time it is conducted, or the existence of a plan for the
taxpayer to conduct similar activity in the future. It appears sufficient that
the taxpayer has planned and conducted at least one R&D project, for which
it has adopted a defined aim, timetable and resources.

Condition 3: relevant

A taxpayer wishing to claim IP Box relief is required to maintain separate,
detailed accounting records in a manner enabling calculation of the tax base
for the 5% rate, including the connection between the costs incurred for R&D
work with the income from QIPRs resulting from the R&D work.

First and foremost, the records must contain:

  • Itemisation of each QIPR
  • Determination of the revenue, tax-deductible costs, and net income (or loss) attributable to each QIPR
  • Itemisation of costs attributable to each QIPR, in a manner enabling determination of the qualifying net income.

Additionally, taxpayers working on creation of
more than one QIPR are required to maintain records for each R&D project,
with a breakdown for:

  • Project description
  • Start and end time
  • List of persons taking part in work on each project
  • List of works created in each project, attributed by name to the persons performing the work.

Thus a taxpayer creating, for example, a video game must itemise all of the
QIPRs arising in connection with the game development and maintain a separate
record for each of them. It is possible to treat a game as a single (aggregate)
QIPR, but such situations seem to be in the minority. Maintaining entries in a
manner ensuring determination of the aggregate income from the QIPR or use in
the product or service is permissible in particular when a division into
specific QIPRs is not possible.

The record must be prepared with cumulative recognition of expenses with
respect to specific tasks (based on a set of documents confirming the incurred
expenses). The cumulative set of documents should thus cover the expenses from start
of the R&D activity aimed at creation, elaboration or improvement of the QIPR,
through the end of the given calendar month.

The regulations do not dictate how the records should be maintained for
purposes of the IP Box. In particular, the records do not have to be prepared
in a uniform manner, according to a specified template. Maintaining full
accounting is also not required. An acceptable method of maintaining the
accounting books is a tax ledger of revenue and expenses. In the case of
taxpayers who maintain such a ledger, the requirement to ensure itemisation of
the records for each QIPR project may be fulfilled by preparing, via a computer
spreadsheet, a cumulative monthly set of documents confirming the expenses
incurred for the QIPR project as of the end of the given month.

These records must be maintained on an ongoing, current basis, even
though the IP Box is applied to annual taxable income. The tax authorities take
the strict position that creation of separate records after the fact in order
to meet the requirements of the IP
Box regulations eliminates the right to apply the IP Box, even when the
retrospective records allow for correct determination of the basis for taxation
at the 5% rate (e.g. individual interpretation by the director of the National
Revenue Administration Information Centre of 27 November 2019, no.

The electronic version of the record should be archived, and the spreadsheet
should be structured to allow data to be generated at a later date showing the
state as of the end of specific calendar months.

of income taxed at 5% rate

The amount of income subject to taxation at the preferential 5% rate is the
product of the income from QIPR achieved in the given tax year and an
adjustment known as the “nexus factor”:

income taxed at 5% CIT or PIT = income from QIPR
× nexus factor

If the taxpayer generates income from
more than one QIPR, the basis for taxation is the sum of the products
calculated for each QIPR.

QIPR income

Income (or loss)
from QIPR is income (or loss) from:

  • Fees or receivables under a licence agreement involving QIPR
  • Sale of QIPR
  • QIPR reflected in the sale price of goods or services
  • Damages for infringement of QIPR awarded in a contentious proceeding
    (judicial or arbitration).

income is the surplus earned during the tax year of revenue from this source
over the costs of generating the revenue. If the costs exceed the revenue, the
difference is a loss from the source of the revenue. Thus for purposes of
calculating income from QIPR, revenue-earning costs should also be reflected,
including indirect costs.

The amount of revenue from
commercialisation of QIPR may be established in particular based on sales
invoices issued, corresponding to provisions of concluded contracts. For the
purpose of determining net income from QIPR, this revenue should be reduced by
the direct and indirect costs of earning the revenue. This should not present
problems when all of the costs involve QIPR. It may prove problematic, however,
when the taxpayer creates software as part of its business, qualifying for the
5% tax rate, but also conducts maintenance work not qualifying for the IP Box. In
that case, it is hard to allocate a specific figure of indirect costs (e.g. for
internet, telephone, or electricity) to these two categories of revenue. It
seems that in this case, the rule that should be applied is that when a taxpayer
incurs costs to generate revenue from taxable sources as well as costs
connected to revenue from other sources, these costs are recognised pro rata in
the proportion of taxable revenue to total revenue. Thus it would appear
warranted to add up all indirect costs incurred as part of the taxpayer’s
commercial activity and allow the costs pro rata, in the proportion of revenue
from QIPR to other revenue.

Nexus factor

nexus factor is an adjustment factor applied for calculation of the final basis
for taxation at the preferential 5% rate under the

The nexus factor is calculated according to the formula


where each letter refers to costs actually
incurred by the taxpayer:

  • “a”—for R&D related to QIPR directly conducted by the taxpayer
  • “b”—for acquisition of R&D results related to QIPR other than those
    falling under “d” from an unrelated entity (within the meaning of transfer-pricing
  • “c”—for acquisition of R&D results related to QIPR other than those
    falling under “d” from a related entity (within the meaning of transfer-pricing
  • “d”—for acquisition of QIPR by the taxpayer.

It follows that the greater the qualifying costs falling under category “a”
or “b” incurred by the taxpayer, the greater the portion of income that may be
subject to the preferential 5% CIT or PIT rate. But the greater the qualifying
costs falling under category “c” or “d” incurred by the taxpayer, the lower the
portion of income that may be taxed at 5% CIT or PIT.

Eligible costs should be
reflected in the nexus factor regardless of how they are recognised in tax
costs according to general tax rules. Consequently, costs for purposes of
calculating the nexus factor should be understood more broadly (functionally)
than for purposes of determining tax-deductible revenue-earning costs under the
other provisions of the CIT Act or PIT Act. On the other hand, under the IP
Box, this particular method of including costs in the nexus factor applies only
for purposes of calculating this factor, and the IP Box does not alter the rules
for treatment of these costs for other purposes, including for calculating the
net income which is multiplied by the nexus factor.

Eligible costs for purposes of
the IP Box are not identical to eligible costs for purposes of R&D tax
relief. For example, the tax authorities have recognised expenses for
accounting support and telecommunications services as costs falling under item
“a” above (e.g. individual interpretation by the
director of the National Revenue Administration Information Centre of 21 February
2020, no. 0113-KDIPT2-1.4011.654.2019.2.MM), whereas for purposes of R&D
relief these items would not constitute eligible costs. It seems, by the way, that
it would be hard to argue that most taxpayers use accounting or telephone services
for R&D.

Numerous doubts are also raised by the eligibility of fees for
subcontractors for the IP Box, in particular the fees of numerous persons cooperating
in a B2B model via individual businesses. Depending how the regulations are
interpreted, such costs could be assigned to either item “b” (as the result of R&D
work, raising the nexus factor) or item “d” (reducing the nexus factor). Interpretations
of the IP Box made so far by the tax authorities seem to reward the use of
programmers operating their own businesses. All of the fees obtained from sale
of software created entirely by a programmer, as well as work connected with improvement
or modification of software, qualifies for inclusion in the IP Box relief.

This consequently raises the question of whether the entities paying such
fees to programmers should classify these fees under item “d” (as the
programmers are selling QIPRs). Otherwise, two entities could claim the same
relief for the same QIPR, while classifying the same rights differently (the
programmer as the sale of QIPR and the buyer as the purchase of R&D results).
However, it seems that this approach may be too restrictive. On the part of the
programmer, commercialisation of QIPR arises on the revenue side and determines
the very possibility of applying the IP Box, indicating the added value from QIPR,
while on the part of the entity cooperating with the programmer, the value of
the same QIPR arises on the cost side and may affect the level of the nexus


For the video game industry, the IP
Box offers a very attractive tax solution, which may be exploited not only by
firms employing programmers to prepare products (IT systems), but also by
programmers operating their own businesses, who as business operators cannot
claim the preferential deduction of 50% revenue-earning costs.

But any taxpayer wishing to take
advantage of the IP Box relief should carefully verify whether they meet the
conditions for applying the 5% income tax rate, so that they can easily prove
in the event of an audit that they are properly claiming this tax preference.

Joanna Prokurat

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