Let’s consider together why the nexus ratio is so important, what IP Box qualified costs are, and whether a taxpayer using the IP Box relief must incur any costs included in the nexus ratio.
What is the Nexus Ratio?
Let’s recall that if a taxpayer incurs any cost directly related to their R&D activities, regardless of the amount, the ratio will ultimately be 1. Thus, 100% of the income previously allocated from qualified intellectual property rights can be taxed at the 5% IP Box rate.
This is, of course, one of the most important points when taking advantage of the IP Box relief. If, in the event of an audit, the tax authorities find that the costs incurred by the taxpayer were not actually costs incurred “for the taxpayer’s directly conducted R&D activities related to qualified intellectual property rights,” the nexus ratio will be “0.” This will mean that the taxpayer cannot use the IP Box relief, and the income should be taxed according to the taxpayer’s chosen model (i.e., linearly 19% PIT or according to the scale 17/32% PIT), with all the negative consequences.
This topic was discussed in more detail in our previous post:
IP Box qualified costs included in the Nexus ratio
Examples of costs
As examples of IP Box qualified costs included in the nexus ratio, we can mention those indicated in the itax rulings currently issued by the Director of KIS, such as:
- expenditures on the purchase of necessary software for programming activities (e.g., tax ruling dated 23 November 2020, ref. 0115-KDIT2.4011.597.2020.2.HD);
- expenditures on internet access and telecommunications services (e.g., tax ruling dated 13 December 2019, ref. 0113-KDIPT2-3.4011.487.2019.3.GG);
- expenditures on the purchase of computer equipment (e.g., tax ruling dated 13 December 2019, ref. 0113-KDIPT2-3.4011.487.2019.3.GG, or dated 6 November 2020, ref. 0113-KDIPT2-3.4011.614.2020.2.IR);
- expenditures on specialist training or professional literature (e.g., tax ruling dated 13 December 2019, ref. 0113-KDIPT2-3.4011.487.2019.3.GG).
Do tax rulings resolve the issue?
However, there is bad news for taxpayers because the resolutions issued by tax authorities in this matter, even if favorable, contain many ambiguities to the extent that it is difficult to consider them binding. They most often answer whether such categories of costs can be included in the nexus ratio, but they somewhat shift the responsibility for proving the direct connection of specific costs to the qualified intellectual property rights created. Note the statements used in the justification of the tax ruling ref. 0111-KDIB1-3.4011.55.2020.2.APO dated 14 May 2020, which states:
„It should therefore be assumed that if the taxpayer actually incurred expenses that qualify as costs of the R&D activities conducted by them, the expenses related to the creation of qualified IP within these activities should be considered actual costs incurred by the taxpayer for the directly conducted R&D activities related to the qualified intellectual property rights, subject to Article 30ca(5) of the Personal Income Tax Act.”.
Therefore, considering the costs included in the nexus ratio, the taxpayer must answer whether, in the event of an audit, they can prove that the cost was indeed incurred for their directly conducted R&D activities and was directly related to the qualified intellectual property rights.
Therefore, the tax authorities may question the inclusion of costs such as accounting services, social security contributions (ZUS), and vehicle operating expenses in the nexus ratio during potential audits. It is certainly easier for a taxpayer to justify the IP Box qualified costs of purchasing essential programming equipment or software necessary for programming activities.
Exceptions
It is worth noting that, according to Article 30ca(5) of the PIT Act (or 24d(5) of the CIT Act), the costs not directly related to qualified intellectual property rights, especially interest, financial fees, and real estate-related costs (e.g., rental costs of real estate where R&D activities are conducted or interest on a loan for its purchase), cannot be included. Such costs can only be considered indirectly related to the creation, development, or improvement of qualified intellectual property rights (see OECD BEPS Action Plan 5, paragraph 39).
Unfortunately for sole proprietors, according to MF’s tax explanations, the cost of their own work cannot be included in the nexus ratio. In industries like IT, this will be a significant problem for service providers who do not incur any expenses for creating qualified intellectual property beyond their own work.
IP Box qualified costs – summary
Thus, the nexus ratio filters the income earned by the taxpayer from qualified intellectual property rights, indicating which part can be taxed at the preferential 5% PIT rate. This reflects the OECD’s approach, according to which the preference can only be used to the extent that it results from R&D activities and the expenditures incurred on them. Therefore, the nexus ratio and the IP Box qualified cost side of the so-called IP BOX relief should not be underestimated!
Considering this issue should be one of the key elements of verification before implementing the so-called IP Box relief in your activities.
This is the second post explaining the essence of income related to the IP Box and the nexus ratio. Other publications will follow soon. If you have questions about using the IP Box relief, visit us at www.outsourced.pl .
