Resolving doubts in the application of the R&D relief and IP Box preferences

Irrespective of the field of law, it is not uncommon for the new regulations to raise doubts. Below, we present selected judgments and interpretations that has shaped the practice of applying research and development (R&D) relief and IP Box.

R&D in TCG

A Tax Capital Group (TCG) is a specific CIT payer, which may be formed by companies related by capital. The subject of taxation in the TCG is the consolidated tax income, which is the surplus of the total income of the companies included in the group over the sum of their losses.

The director of the National Tax Information (NTI) confirmed the right of TCG as a CIT taxpayer to deduct eligible costs incurred by group companies under R&D relief (e.g. in the individual interpretation of May 15, 2019, reference number 0114-KDIP2 -1.4010.113.2019.2.MR). However, he questioned the possibility of applying R&D relief by TCG in a situation when some companies within the group suffer a unit loss or have insufficient income. As pointed out by Voivodship Administrative Courts (VAC), the Corporate Income Tax Act lacks provisions that would make the right of TCG to deduct eligible expenses conditional on whether a particular company has generated a profit or a loss (Judgement of the VAC in Warsaw of 28 January 2020 III SA/Wa 1638/19 and the Provincial Administrative Court in Opole of October 20, 2021, reference number I SA/Op 312/21; judgments not final). According to this stand, in the event that the income of the company forming a TCG is lower than the amount of deductions to which it is entitled, the TCG may also benefit from the full deduction of eligible costs (provided that the sum of income and losses of all entities included in the TCG exceeds the sum of eligible costs subject to be deductible under R&D relief).

The Supreme Administrative Court (SAC) ruled that mutual settlements between companies forming a TCG cannot be considered as reimbursement of eligible costs, which would exclude them from the calculation of the write-off under R&D relief (Judgement of the Supreme Administrative Court of September 29, 2021, reference number II FSK 436/21). Thus, the Supreme Administrative Court confirmed the possibility of deducting eligible costs incurred from an intra-group transaction (acting on behalf of another company from the TCG).

R&D and exempt income

Income earned from business activities carried out in the Special Economic Zone on the basis of a permit and implementation of a new investment specified in the decision on granting the relief are exempt from the tax (constituting a form of state aid with a limited amount). Pursuant to the provisions on R&D relief, the taxpayers who benefit from the exemptions in question during the tax year are entitled to a deduction of the relief only in relation to eligible costs that they do not include in the calculation of tax-exempt income.

In the case concerning the possibility of deducting eligible costs under R&D relief, which were included in the calculation of  the income not exempted partially from the tax (due to the taxpayer’s exhaustion of the state aid limit), it was decided that the actual amount of the exemptions due is irrelevant, because it concerns the income already counted and calculated for the purposes of the exemption (judgment of the Provincial Administrative Court in Wrocław of October 22, 2020, reference number I SA/Wr 325/20; not final). Thus, the right to deduct eligible costs under R&D relief applies only to eligible costs that do not constitute the costs of conducting business activities in the zone or activities covered by the decision on granting the relief, and the fact that the exemption is only partially used is irrelevant.

Keeping records for the needs of IP BOX

In the situation in question, the taxpayer who submitted a motion for an individual interpretation to confirm the correctness of keeping IP BOX records met with a negative assessment of the authority regarding the deadline for preparing the records for the purpose of preferential taxation. In the opinion of the Director of NTI, the applicant was not entitled to benefit from IP BOX for the previous settlement periods, because he started keeping records only after their completion.

The taxpayer appealed against the received interpretation, and consequently he received a favorable judgment from the administrative court (Judgment of the Provincial Administrative Court in Warsaw of November 10, 2021, reference number III SA/Wa 1173/21; not final). The court stated that for the purpose of calculating income from eligible IP, it is important for the records to be kept in a proper manner so that  the total sum of revenues, tax costs, income, losses, income subject to tax at the 5% rate and income which will not be subject to preferential taxation would be easily demonstrated in the annual tax return.

Therefore, there are no grounds to acknowledge the stand, according to which the condition to consider the record correct within the regulations on IP Box (meeting the purpose of this regulation), is to keep it “on an ongoing basis”, i.e. to keep it from the beginning of the period for which the taxpayer wants to benefit from the preferences and to make subsequent entries in it.

Obligation of the authority to assess whether an activity belongs to research and development activities

Classifying an activity as a research and development activity within the provisions on IP Box is very often problematic for the taxpayers. This problem was faced by an IT specialist who wanted to benefit from the preferential taxation under IP BOX and asked if his activity meets the conditions for recognizing it as a research and development activity.

The tax authority, in connection with the taxpayer’s application for an interpretation, refused to issue an answer and left it without consideration. He justified the above by the fact that the Director of KIS as a tax authority is not entitled to independently determine the facts described in the application.

The above position was questioned by the court of first instance and finally by the Supreme Administrative Court, which stated that: “a taxpayer applying for an individual interpretation cannot be required to decide on their own whether their activities constitute research and development activities within the Art. 5a points 38-40 of the Personal Income Tax Act.” (Judgement of the Supreme Administrative Court of January 13, 2022, reference number II FSK 1333/21).