Research and development tax deduction 2022

Starting from 2022, the research and development deduction was extended and supplemented by a new solution, called the innovative employee deduction. 

The research and development tax relief entitles the taxpayer to deduct from the tax base the speific research and development costs. Taxpayers exempt from tax in special economic zone or on the grounds of a support decision, may benefit from the the research and development deduction only with the costs not included in the calculation of the exempt income. This, in practice, excludes these taxpayers from the research and development relief, as it is usually under investments in special economic zones or the Polish investment zone that these taxpayers carry out the most intensive research and development as part of tax-exempt activity.

What can be deducted

Eligible costs include:

1. remuneration incurred in a given month from a professional relationship, employment relationship, outwork and co-operative employment relationship, as well as contracts of mandate and contracts for specific work, to the extent that the time spent on research and development remains in the overall working time of the employee or service provider in a given month,
2. the acquisition of materials and raw materials directly related to the research and development,
   
   2a. acquisition of non-tangible specialised equipment used directly in the conducted research and development activity, in particular laboratory utensils and instruments and measuring equipment,
   
   
3. expert opinions, advisory services and equivalent services provided or performed under a contract by a scientific entity, as well as the acquisition from such an entity of the results of scientific research conducted by it, for the purposes of research and development,
4. the use, against payment, of scientific and research apparatus used exclusively for research and development activities, where this use does not result from a contract concluded with a related party,
   
   4a. purchase of a service for the use of research and development apparatus solely for the purposes of research and development activity conducted if the purchase of the service does not result from a contract concluded with a related party,
   
   
5. costs of obtaining and maintaining a patent, right of protection for a utility model, right from registration of an industrial design.

Definitions

The definition in the Act includes a number of characteristics that a taxpayer’s activities must have in order to be considered research and development, i.e.

1. it must be a creative activity,
2. it must be undertaken in a systematic manner,
3. it must involve one of two categories of activities – research or development,
4. it must be undertaken for a purpose defined by law – to increase the know-how and to use the know-how to create its new applications.

According to the Frascati Manual, research and development activities should be:  

1. innovative,  
2. creative,
3. unpredictable (not based on existing routine patterns),
4. methodical,  
5. transferable or reproducible.

In terms of the definition of development, the Act refers to the Law on Higher Education and Science, under which development is an activity involving the acquisition, combination, formation and use of currently available knowledge and skills, including computer tools or software, for production planning and the design and creation of altered, improved or new products, processes or services, excluding activities involving routine and periodic changes made to them, even if such changes are of improving character.

Increased deduction from 2022

A significant part of eligible costs often includes so-called employee costs, i.e. the remuneration of personnel involved in research and development  activities.

Starting from 2022, all taxpayers are entitled to a deduction of 200% of such eligible costs (currently 150%). The increased deduction applies to expenses incurred after 31 December 2021.

The deduction is made for the tax year in the annual tax return. Where a taxpayer has incurred a loss for a tax year or the amount of the taxpayer’s income is less than the amount of the deductions which the taxpayer is entitled to, the deduction – either of the full amount or of the remainder, as the case may be – shall be made in returns for the consecutive six tax years immediately following the year in which the taxpayer applied or was entitled to apply the deduction.

Cash refund

Selected taxpayers are entitled to a cash refund where, in their first year of operation, they were unable to fully use the deduction because of the low income or tax loss. 

Such a taxpayer, as long as they have the status of a micro, small or medium-sized entrepreneur, will also benefit from a cash refund if they are unable to fully claim the research and development  tax credit in the second year of operation for the same reasons.

Innovative employee tax relief

Starting from 2022, the research and development  tax credit will be extended to include a solution – alternative to the cash refund.

A taxpayer that cannot dedduc research and development costs in full due to low income or tax loss is allowed to to retain part of the personal income tax advances wothheld from wages of innovative personnel.

The amout retained would be the amount of potential tax relief if the taxpayer deducted the costs in full.

On may consider advances deducted from payments in respect of:

1. professional relationship, employment relationship, outwork, co-operative employment relationship and social security cash allowance paid by the taxpayer;
2. performance of services under a contract of mandate or a contract for specific work;
3. copyrights

For the purposes of the said incencitve “innovative employees” means employees who spend at least 50% of their time in month for research and development.

Unlike the cash refund, the innovative employee tax incentive is aimed at all taxpayers accounting for research and development  tax relief. The size of the taxpayer’s business or whether the taxpayer is in its first, second or any other year of operation is utterly irrelevant in this case. The only exception is if the taxpayer is entitled to a cash refund instead.