R&D relief was included in Poland’s income tax law from 1 January 2016. A year later, under the “Small Innovation Act,” major changes were introduced to make the incentives more attractive.
R&D relief in 2016
The mechanism for the R&D write-off was that a taxpayer conducting research and development activity had a right to take an additional deduction from the tax base for PIT or CIT for R&D costs.
The relief covered expenditures on the following activity:
- Research and development activity—i.e. creative activity including scientific research or development work undertaken systematically with the aim of increasing knowledge resources and their exploitation for creation of new applications
- Development work—i.e. acquiring, combining, shaping and exploiting currently available knowledge and skills in the field of science, technology and business, other knowledge and skills for planning production, as well as design and creation of new, updated or improved products, processes or services (excluding work on routine and periodic changes in products, production lines, manufacturing processes, existing services, or other operations in process, even if such changes are improvements), and more specifically:
- Development of prototypes and pilot projects, as well as demonstration, testing and validation of new or improved products, processes or services in an environment modelling actual operating conditions, where the main aim of the development is further technical improvement of products, processes or services whose final shape has not yet been determined
- Development of prototypes and pilot projects that may be used for commercial purposes, when the prototype or pilot project constitutes a ready-to-use end commercial product but it would be too costly to produce exclusively for demonstration and validation purposes.
A specified percentage of costs incurred on R&D activity (qualified costs) was subject to deduction from the tax base, depending on the size of the taxpayer and the category of costs. The following could be deducted as qualified costs:
- Salary and employer-paid social insurance premiums of staff employed for realisation of R&D activity
- Acquisition of goods and raw materials directly connected with R&D activity
- Expert opinions and reports, advisory or similar services, as well as acquisition of the results of research conducted under contract by a research unit for the purposes of R&D activity
- Paid use of scientific and research apparatus exclusively for R&D activity (but not under a contract with an affiliate of the taxpayer)
- Amortisation of fixed assets and intangibles used in R&D activity, apart from passenger cars and separately owned buildings, premises and structures.
In the case of qualified salary costs, an additional 30% deduction could be taken regardless of the taxpayer’s size. In the case of the other qualified costs listed above, the additional deduction was 20% for micro, small and medium-sized taxpayers or 10% for large taxpayers.
Two types of costs were excluded from R&D relief:
- Costs reimbursed in any form
- Cost incurred by an enterprise which in the given year conducted activity in a special economic zone on the basis of a permit to operate in the zone (regardless of whether the permit covered R&D activity).
Deductions from the tax base for R&D relief could be taken over 3 successive years, if in the year when the taxpayer became entitled to take the deduction it generated a loss or did not earn enough profit to take full advantage of the deduction.
Major changes from 2017
From 2017, lawmakers have introduced a number of changes in the functioning of R&D relief which should make the incentives more attractive. In particular, the changes should increase the financial effectiveness of the relief for entities conducting R&D activity, and thus contribute to increased competitiveness of the Polish tax system in this area. Some of the changes apply to micro enterprises and SMEs, while some affect all taxpayers regardless of size.
The changes should make R&D incentives more attractive as more and more taxpayers take advantage of additional deductions for R&D expenditures.
We outline the new regulations below.
Expanded catalogue of qualified costs
Under the amendment to the regulations on R&D relief, the catalogue of qualified costs is expanded. In addition to the previous items, qualified costs now include costs of obtaining and maintaining rights to patents, utility models, and industrial designs, incurred for:
- Preparation of registration documentation and filing for registration with the Polish Patent Office or equivalent foreign authority, including translation costs
- Conducting proceedings before the Patent Office or foreign equivalent, from the time of filing, including official fees and costs of legal representation and adjudication
- Defending against objections of failure to meet the conditions for registration of a patent, utility model or industrial design, during or after the registration proceeding, including costs of legal representation and adjudication, before the Patent Office or foreign equivalent
- Periodic fees, renewal fees, translations and other measures necessary for issuance or maintenance of rights to a patent, utility model or industrial design, including more specifically the costs of validation of a European patent.
But this expanded range of qualified costs is limited in terms of the entities that may take advantage of it. Only SMEs are entitled to claim qualifying costs for obtaining and maintaining industrial property rights.
Increase in level of qualified costs
From 2017, the limits on deduction of qualified costs for large taxpayers and SMEs are significantly increased. SMEs conducting R&D activity are entitled to deduct 50% of qualified costs as R&D relief. Large enterprises are entitled to deduct 50% of qualified costs for salary and social insurance contributions and 30% of other qualified costs.
Extension of deduction period
From 2017, the period for carrying forward R&D relief if the taxpayer is unable to take a full write-off in the tax year when the qualified cost is incurred is extended to 6 years.
Cash tax refund
An entirely new solution is the possibility to obtain a cash refund equal to the deduction for qualified costs in the case of taxpayers who generate a loss or income insufficient to take the full deduction. This right is available to all taxpayers in their first year of operation as a new enterprise, or SMEs in their first or second year.
Taxpayers are not eligible to take advantage of the preference for newly launched taxpayers (regardless of their size) if they are created:
- As a result of a reorganisation, merger or division of taxpayers
- As a result of conversion of the business form of a sole trader or partnership without legal personality
- By legal or natural persons or units without legal personality who have contributed to the new taxpayer’s share capital an enterprise previously conducted by them, organised part of such enterprise or assets of such enterprise with a fair market value exceeding the equivalent of EUR 10,000 (at the National Bank of Poland rate from the first business day of October of the year preceding the tax year in which the contribution is made, rounded to the nearest PLN 1,000), or
- By legal or natural persons or units without legal personality making in-kind contributions to the share capital of the taxpayer of property obtained by them from liquidation of other taxpayers, if they held shares in the liquidated taxpayers.
In addition, such cash refund has to be repaid to the tax authority if the taxpayer enters bankruptcy or liquidation within the following 3 tax years.