How taxes support innovation and development in the IT industry?

Entrepreneurs operating in the IT industry can benefit from a wide range of tax reliefs and preferences aimed at supporting innovation and technological development. It is not surprising that so many solutions are dedicated to this fast-growing industry, given its key role in creating cutting-edge solutions for companies.

Among the most popular tax instruments available to the IT industry are:

1. the research and development tac reliefs (which allows for the deduction of costs related to R&D activities),
2. a preferential 5% tax rate for income from qualified intellectual property rights (the so-called IP Box),
3. tax relief for innovative employees or
4. the possibility of applying 50% tax deductible costs for creative employees.

However, this list does not conclude the list of preferential solutions available to the IT industry (e.g. in some cases taxpayers will be able to benefit from CIT or PIT exemptions within the Polish Investment Zone or accelerated depreciation of fixed assets undergoing rapid technological progress).

The right combination of these solutions can significantly reduce the tax burden for both entrepreneurs and their employees and associates. We present below a characterisation of the most commonly used preferential tax solutions in the IT industry.

Research and development tax relief

Research and development activity (for the purposes of the R&D tax relief) is to be understood as development works or scientific research fulfilling jointly three conditions: creativity, systematicity and increasing the stock of knowledge or using the knowledge to create new applications. This definition is often met by creative activities in the IT industry, such as the development of new software, applications or scripts.

In practice, any software house that creates new solutions will be able to benefit from the R&D relief.

What is the R&D tax relief based on?

The R&D relief even allows for an additional deduction from the tax base of certain tax-deductible costs incurred for research and development activities, e.g:

• 200% of personnel costs (salaries of employees together with social security contributions to the extent that they are involved in R&D projects),
• 100% of other eligible costs (e.g. costs of purchasing materials and raw materials or specialised equipment directly related to the R&D activity conducted).

In IT companies, the greatest benefit from the R&D tax relief comes from deductions of employee costs, primarily IT developers salaries. As part of expenses other than employee salaries, taxpayers can also deduct the costs of necessary resources to conduct R&D, including among others the cost of computers, computer peripherals and software licences.

In order to benefit from the R&D tax relief, as a rule, it is not necessary to have completed work on a particular project or to have received revenue in connection with it. This is because it is possible that the research and development work will end in failure.

Tax relief for innovative employees

This relief complements the R&D relief described above. It is the equivalent of a cash refund, serving to settle the eligible costs of the R&D relief more quickly if income is too low in a given tax year or a tax loss is made – instead of carrying these costs forward to be deducted in the following 6 tax years.

The Innovative Employees tax relief is available to PIT-remitters entrepreneurs who carry out research and development activities. Within the relief, a taxpayer deducts from PIT advances – collected from employees employed, inter alia, on the basis of an employment contract or civil law contracts – the product of qualified costs which he did not deduct from his income in his annual return under the R&D relief and the tax rate applicable to the taxpayer in the given tax year. The possibility of deducting R&D costs from the PIT advance payment occurs with respect to employees spending at least 50% of their working time in particular months on R&D tasks.

IP Box

The IP Box is a relief allowing the application of a 5% tax rate to income obtained from the commercialisation of qualified intellectual property rights obtained in the course of R&D activity, i.e. the sale of a right, granting of a licence or inclusion of a given IP in the price of a given product offered on the market. The IP Box relief is applicable both to CIT taxpayers who are taxed in accordance with the general rules and PIT taxpayers taxed in accordance with the tax scale or flat tax rate.

One of the qualified intellectual property rights subject to the 5% tax rate under the IP Box is the copyright of  a computer programme. This means that the legislator has explicitly indicated that the IP Box may apply in the IT industry.

When settling the IP Box, it is important that it is done in the annual return, so it is not possible to settle the IP Box in advances for income tax (PIT or CIT). Prior to the settlement itself, it is worth preparing for such a settlement, e.g. by verifying the accounting records kept or filing an application for an individual tax ruling in order to confirm the possibility of applying the IP Box.

It is worth emphasising that both the R&D tax relief and the IP Box can be settled retroactively for not expired tax years by correcting annual PIT or CIT returns, and then submitting applications for acknowledgement of overpayment.

Important!

At the end of 2024, the statute of limitations for settling the R&D tax relief for 2018 will expire for taxpayers with a tax year coinciding with the calendar year.

Lump sum tax for IT professionals collaborating on the basis of a B2B contract

In recent years, taxation in the form of a lump sum tax on recorded revenue has become increasingly popular among individuals running a individual business in the IT sector. This is a simpler taxation model than the general rules or flat tax. The basis for taxation is revenue, not income (revenue-earning costs).

The lump sum tax rate depends on the business activity actually performed and its classification in the relevant code of the Polish Classification of Goods and Services. In the IT industry, the most common rates are 8.5%, 12% or 14%.

For example, entrepreneurs providing services related to:

• graphic design – use the 14% rate,
• software, software and hardware consultancy – use the 12% rate.

On the other hand, the 8.5% rate applies to services that are not explicitly mentioned in the Act on lump sum tax rate from recorded revenue. Reaching for the line of interpretation of the Director of the National Fiscal Information, it can be assumed that in certain situations, those entitled to benefit from it may be, e.g. product manager, project manager, application tester, IT architect.

It is worth noting, however, that interpretation disputes arise as to the application of the 8.5 % and 12 % lump sum tax rate from recorded revenue between taxpayers operating in the IT sector and the tax authorities. Before applying the appropriate flat rate, it is worth analysing the actual scope of work performed, including the provisions of contracts between IT entrepreneurs and clients. If doubts arise, in order to secure the taxpayer’s position, it is possible to consider obtaining an interpretative opinion from the Central Statistical Office (GUS) on the PKWiU classification of the business activity performed, and then an individual interpretation issued by the Director of the National Fiscal Information.

50% author’s tax deductible costs

This rule applies to employees and persons cooperating under a contract of mandate or contract for specific work who perform creative activity and obtain revenue from the transfer of copyrights to works created. Increased tax-deductible costs may be applied to taxpayers’ revenue from titles specified in the PIT Act, including, among others, income from creative activity in the field of computer programmes, computer games or research and development activity. As part of the 50% tax-deductible costs, taxpayers may deduct no more than PLN 120.000 per year.

Thus, 50% tax-deductible costs may be applied, for example, by a programmer who receives a fee for creating source code and transfer the right to it to his employer. However, it should be borne in mind that the issue of the transfer of copyright (although, as a rule, this happens automatically) may need to be appropriately regulated in an agreement with the employer.

Summary

IT entrepreneurs can choose from a number of tax preferences, but it is very important to take a comprehensive approach and develop a strategy to implement the above-mentioned reliefs.

For example, the R&D relief and the IP Box can be used in parallel to reduce one’s tax liability. In the case of acquiring the results of employees’ creative work, one may additionally consider verifying that these employees are not entitled to 50% deductible costs.

How does MDDP support the IT sector?

In order to implement solutions that are optimal for a given business model, we assess the nature of the business, identify the scope and principles of accounting for potential reliefs and prepare procedures to support the documentation and record-keeping processes. In order to secure the legal and tax situation of the entrepreneur, we prepare applications for individual interpretations or the so-called defence file.

We provide comprehensive support at the stage of implementation and settlement of tax reliefs. We also carry out periodic audits verifying the correctness of application of tax preferential solutions.

If you operate in the IT sector and are considering the implementation of individual reliefs or verification of the correctness of their settlement, we invite you to contact us.