Let’s consider which revenues may be covered by the IP Box relief, why incurring certain expenses is necessary to apply the IP Box relief and what role does the so-called nexus indicator. Let’s start from the IP Box income.
Why do we write about that?
Amendments to the regulations from 2019 introduced the possibility of using the so-called IP Box relief. It provides for a preferential income tax rate of 5% on income from qualified intellectual property rights (Article 30ca section 1 of the PIT Act and Article 24d section 1 of the CIT Act). Since copyright to a computer program belongs to this category, IP Box has become an attractive solution for entities operating in the IT industry. Having a qualified IP right is not the only condition for using the IP Box. The attractive possibility created by the legislator brings numerous legal doubts. Unfortunately, the 86-page tax explanations issued by the Ministry of Finance are not always helpful here.
IP Box income – what is taxed at the 5% rate?
To simplify – the IP Box relief means preferential 5% tax rate on income obtained by the taxpayer from intellectual property rights, which the taxpayer is the owner, co-owner, user or has the right to use under a license agreement and which are protected under applicable law national or international by e.g. a patent or a copyright to a computer program (the so-called qualified intellectual property rights / qualified IP). The tax on the qualified income earned by the taxpayer as part of economic activity from qualified intellectual property rights amounts to 5% of the tax base (Article 30ca section 1 of the PIT Act).
The tax base
The tax base here is the sum of all qualified income from all qualified intellectual property rights earned in the tax year (Article 30ca(3) of the PIT Act).
A detailed list of income titles is indicated in Art. 30ca sec. 7 of the PIT Act. Enterpreneurs from the IT industry are most often affected by two of the four examples listed there (points 2 and 3). Pursuant to Art. 30ca sec. 7 points 2 and 3 of the PIT Act, the income (loss) from a qualified intellectual property right is calculated in accordance with Art. 9 sec. 2 income (loss) from non-agricultural economic activity to the extent that it was achieved, among others, from the sale of a qualified intellectual property right (point 2) or from a qualified intellectual property right included in the sale price of a product or service (point 3).
The nexus indicator
Article 30ca para. 4 of the PIT Act
The amount of qualified income from a qualified intellectual property right is determined as the product of income from a qualified intellectual property right achieved in the tax year and the indicator calculated according to the formula:
[(a + b) ∗ 1,3] / [a + b + c + d]
where the individual letters indicate the costs actually incurred by the taxpayer for:
a – research and development activities conducted directly by the taxpayer related to the qualified intellectual property right;
b – acquisition of the results of research and development works related to the qualified intellectual property right, other than those listed in point (a) d from an unrelated entity within the meaning of Art. 23m sec. 1 point 3;
c – acquisition of the results of research and development works related to qualified intellectual property rights, other than those listed in point (a). d, from a related entity within the meaning of Art. 23m sec. 1 point 4;
d – acquisition by the taxpayer of a qualified intellectual property right.
Pursuant to art. 30ca sec. 6 of the PIT Act “If the value of the indicator referred to in par. 4 is higher than 1, it is assumed that this value is 1.”. You can read more on the “nexus approach” in the OECD BEPS Report Action Plan No. 5, paragraph 30.
IP Box income – qualified income
To sum up these complicated regulations – in order to determine the sum of all qualified income from all qualified intellectual property rights earned in the tax year, you should: determine the qualified income from each qualified IP produced and commercialized during the tax year.
Qualified income from qualified IP (income taxable at the 5% rate) is determined as the income from a given intellectual property right multiplied by the nexus ratio during the tax year. So, as a result, this nexus indicator needs to be set accordingly.
Why the nexus indicator is so important?
If the nexus ratio is 0, then 0% of the income earned from a given right can be taxed in accordance with the IP Box rules, while if the nexus ratio is 1, 100% of the qualified income can be taxed in accordance with the IP Box.
Considering the above and the essence of calculating the nexus ratio, it can be concluded that preferential taxation is possible only if the taxpayer incurs any costs that are directly related to the qualified intellectual property right.
What is extremely important, because taxpayers running sole proprietorships often do not incur costs directly related to the IP Box. Therefore, the nexus indicator and the cost side of the so-called IP BOX relief!
Confirmation of this position is the latest judgment of the Provincial Administrative Court in Szczecin of October 22, 2020 (file reference number: I SA/Sz 591/20), the court stated that if the programmer does not incur any costs directly related to the creation or development of the software, he cannot use the IP Box because it cannot determine the nexus indicator (it is equal to 0). Of course, one can argue with the reasonableness of this solution and with mathematical calculations, however, this position is currently quite uniform, so it should be followed.
Should you have any questions regarding the application of the IP Box relief (IP Box income), feel free to contact us at www.outsourced.pl.
