All IT companies (and not only) should consider applying the R&D tax relief
According to preliminary data provided by the Ministry of Finance, 951 CIT taxpayers benefited from the R&D (research and development) relief in 2018. This is an increase compared to 2017, when only 597 taxpayers decided to use it. The COVID-19 pandemic and the extension of the deadline for submitting the annual CIT declaration caused that data for 2019 has not been published yet.
Despite the upward trend, there are still many taxpayers who could benefit from this relief, and for various reasons, they do not.
The increase in the number of requests for individual tax interpretations in connection with the R&D relief in 2019 indicates both the enlarged popularity of the R&D relief and the carefulness of entities using it. According to the report by PARP the IT industry in Poland is responsible for about 8% of GDP, it is represented by over 60,000 entities. It would seem that the R&D tax relief should be one of the most popular among companies in this sector, because a large part of the work carried out by these entities can be considered as research and development (R&D) activity. However, this is not confirmed in the statistics.
What is R&D relief?
The relief allows to deduct from the tax base the costs incurred for R&D activity (the so-called “eligible costs”), previously included in the tax deductible costs. This means that considered eligible costs reduce the tax base twice. It may constitute a significant reduction in the tax burden, given that the basic CIT rate in Poland is 19%.
The amount of the deduction in the tax year should not exceed the amount of income derived from income other than income from capital gains.
Eligible costs in R&D relief
The eligible costs include, among others:
- remuneration, including remuneration for civil agreement contracts and specific task contracts + social security contributions on these remuneration (to the extent that they devoted their time to R&D activities)
- costs of paid use of scientific and research equipment
- costs of acquiring non-fixed assets equipment, materials and raw materials directly related to the research and development activity
How much can be deducted?
A maximum of 100% or 150% (for research and development centers) of eligible costs.
Additional deductions for research and development centers are considered to be state aid. Therefore, they are subject to restrictions and reporting obligations. Taxpayers who intend to take advantage of the tax relief are required to identify the costs of R&D activity in the records kept.
Examples of work in the field of R&D in the software development industry are: (according to the Recommendations on obtaining and presenting data in the field of R&D 2015 Frascati)
- creating new operating systems or languages,
- design and implementation of new search engines based on original technologies,
- activities aimed at resolving conflicts in the field of hardware or software based on the process of system or network reorganization,
- creating new or more efficient algorithms based on new techniques,
- creating new and original encryption or security techniques.
Of course, this is not a closed catalog, and the examples provided concern only software development, not the entire IT industry.
Scientific research and/or development work must meet 3 basic criteria, i.e:
- increasing knowledge resources and using knowledge resources to create new applications,
However, what is important, in order to recognize that we are dealing with research or development activity, it is sufficient to introduce developments or improvements in a product or service already existing in the enterprise.
The basic condition for using the R&D tax relief (R&D tax relief) is proper identification of the activity and documentation of activities carried out by the taxpayer. In order to confirm that eligible costs are incurred, it is recommended detailed documentation (description) of performed R&D works, and keeping time records of employees involved in R&D works. The statutory definitions, however, are so broad that they do not give a clear answer to the question of what is a tax-exempt research and development activity and what is not. The jurisprudence of administrative courts and individual interpretations of tax authorities partially help to dispel these doubts.
R&D relief – how to apply
R&D relief, can be applied by submitting an attachment to the annual tax return – PIT-BR or CIT-BR, respectively. However, it is worth asking the Ministry of Finance for an individual tax interpretation in the scope of including the relevant costs as eligible costs.
Art. 26e of the Act of July 26, 1991 on personal income tax (consolidated text, Journal of Laws of 2018, item 1509, as amended),
Art. 18d of the Act of February 15, 1992 on corporate income tax (consolidated text, Journal of Laws of 2018, item 1036, as amended).