Currently in Poland, a number of corporate tax reliefs and incentives for investors are available, in particular to those interested in new technologies and innovation. Quite often, terms such as IP Box, ASI, R&D tax relief appear in the professional press. Our articles, listed below, provide information and practical knowledge:
However… the world is moving forward and lawmakers are trying to keep up with it. Poland is no different in that respect, this month the Government announced further tax changes. This time however, the changes will not necessarily mean paying more to the taxman. This article explores the Government’s latest initiatives and attempts to juxtapose those proposals with business reality.
Opportunity to take advantage of both IP Box and R&D tax reliefs simultaneously
The first of the announced changes is the opportunity to use IP Box and R&D tax reliefs simultaneously. A quick reminder, IP Box is a potential tax on intellectual property income (licences, computer programs, etc.) set at a rate of 5%, which replaces the standard rate of e.g. 19%. R&D tax relief is simply the possibility of counting selected R&D costs twice as tax costs.
Until now, both have been used as alternatives, i.e. either one or the other. The Government is due to announce that it will be possible to take advantage of both solutions at the same time.
This is very desirable from a business perspective. It is worth remembering that those solutions are mostly used by innovative companies. One of the characteristics of those types of activities is usually a large upfront investment and a slow rate of return which occurs over a lengthy period of time. More often than not there is no profit in the initial phase of business activities, instead there are costs and the losses that result from those. Therefore, the opportunity to benefit from additional tax costs, on top of the reduced 5% tax rate, i.e. to further lower the income base, especially when starting the commercialisation of a product is highly desirable in the market and should significantly contribute towards improving the cash flow of innovative companies and entrepreneurs.
Additionally, a proposal to increase the R&D tax relief itself has been made. This would allow R&D centres only, to increase their additional costs to 200%, from the current 150% which is currently in place for those entities.
Tax reliefs for Alternative Investment Funds (ASI)
Alternative Investment Funds have been operating on the Polish market for a long time. That said, they have only recently been granted a special tax exemption. Allowing ASIs to be exempt from income tax on income from the sale of shares has introduced participation exemption, which has been known to international investors in jurisdictions such as Luxembourg and the Netherlands, to the Polish tax system.
Until recently, to benefit from this exemption, ASIs needed to have owned stocks or shares for at least 2 years and at least 10% before a sale. This threshold has been lowered to 5% in the latest proposals.
The 5% threshold could be seen as very reasonable and rational (after all it already exists in e.g. stock market regulations). It will also open up the possibility for shareholders and minority shareholders to benefit from ASIs from a more diversified portfolio. This is a very positive proposal which will be welcomed above all by investors, working across multiple industries, who are looking to diversify their investment portfolio.
Additional tax reliefs for ASI investors
Another concept, which has not yet been used in practice, is the possibility for individuals to deduct from their tax base an amount representing 50% of the cost of the acquisition (take over) of shares in an ASI or a company in which an ASI holds at least 5% of the stocks (shares).
What does that mean? It means that entrepreneurs who in addition to their regular economic activity from which they pay personal income tax (whether flat rate or progressive) or any other personal income, will be able to deduct from it up to 50% of the cost of the acquisition of shares in an ASI, or a company in which an ASI owns at least 5%. As an example, the capital transferred to an ASI for investment or the amount spent by an ASI on a particular investment (obtained through a loan).
Any conditions? Owning an ASI for at least 2 years and deducting no more than 250,000 PLN per year.
This is a very good offer for those investors who earn an active income from business or personal activities. An entrepreneur will be able to earn income from their day-to-day business activities and invest it in an ASI, and consequently pay less tax at the end of the tax year. Notwithstanding the fact that recent announcements have not made it clear what types of income will be eligible for the relief (for example, it is not known whether dividend income will be eligible), the idea itself should be approached with optimism. In the meantime we must wait for the legislative proposal.
New tax reliefs for prototypes
A proposal has also been made for a new tax relief for prototypes. This tax relief would allow the opportunity to deduct the costs of production of a trial batch of a new product and to introduce said product to the market, on the provision that it is the result of R&D. The value of the relief could be up to 30% of the costs incurred, but not more than 10% of the income.
The Government’s new idea is worthy of attention, especially from innovative industries. And while a number of questions remain, such as what could be considered a product (e.g. a pattern of clothing?), these are simply matters of interpretation that will no doubt be clarified and defined. On the other hand, the very idea that an entrepreneur can deduct additional costs from the introduction of a trial batch or a product will significantly contribute to improving the cash flow of innovative companies, especially in the initial, most sensitive phase of the life cycle of the product.
Relief for innovative workers
Staff costs are one of the main elements of expenditure on innovation. The work of specialists is expensive and is unlikely to become cheaper anytime soon. In addition, if an entrepreneur wants to hire a specialist on an employment contract, then it becomes even more expensive due to taxes and social security costs.
The Government is trying to address these obstacles by proposing a tax relief for innovative workers. The tax relief would allow entrepreneurs to deduct their unused part of R&D allowance from the personal income tax collected on account on behalf of the employees.
The plan to somewhat ease the already very high burden of cost of employment is noteworthy. However, does the main burden really lie in the personal income tax collected on account? HR departments know exactly which body collects the largest payments.
Furthermore, only unused R&D relief can be deducted. It seems that only a chosen few will benefit from this new relief. Time will tell.Finally, it is worth mentioning that most of these proposals could come into law as early as 2022 and because the majority of them deserve our approval even at these early stages of development, it is worth following their progression into fully fledged regulations, especially when planning future investments, of which there should be many after the expected economic recovery.