In the recent years a number of initiatives have been undertaken in order to improve the innovativeness of the Polish economy and the level of expenditures for research and development activities, which has led to an important change in the existing legislation, as viewed from the perspective of entities engaged in R&D activities. Effective from January 2016, based on the newly introduced Amendments to Certain Acts Related to Supporting Innovation Act, amendments to the PIT Act and the CIT Act have entered into force, introducing a tax relief for research and development activities (known as an R&D tax credit). The new regulations have repealed the previous relief connected with acquisition of new technologies. CIT and PIT taxpayers earning revenue from the conduct of non-agricultural business can benefit from the R&D tax credit.
The R&D tax credit enables a deduction of 10 to 30% of expenditures incurred on R&D activities from the tax base of the income tax. As of 2017, a deduction of up to 50% is planned and at the moment new regulatory amendments are being drafted. Similar incentives have functioned successfully in many countries, e.g. Great Britain, Ireland, Czech Republic and Australia. In practice, the expenditures incurred on R&D activities affect the level of the tax base twice – as a tax deductible, in accordance with the related regulations, and as a relief which lowers the CIT or PIT tax base.
What is important, the possibility to benefit from the R&D tax credit is not dependent upon the level of innovativeness or the ultimate effect of the R&D activities performed. Additionally, in contrast to grants, it doesn’t require an application for support as part of a particular call for proposals with a set deadline.
The ability to benefit from the R&D tax credit is conditional upon incurring expenditures which fit the definition of research and development activities, as provided in the act. In this context, it is crucial to remember that research and development activities aren’t conducted only in laboratories – in many cases they can be considered as quotidian, e.g. improving a product or the production process and testing new materials in order to reduce costs. The catalogue of eligible costs is an exhaustive list, which implies that only the enumerated categories can be deducted from the tax base. Eligible costs include the expenditures incurred on:
Eligible costs can be deducted, if they haven’t been returned to the taxpayer in any form. Additionally, taxpayers who in the tax year have conducted business based on a permit in a special economic zone aren’t entitled to the right to deduct. It is important to note that the tax credit is accessible to entities which have received support e.g. for a realization of an R&D project. In such a case, the deduction is applicable to the costs enlisted in the abovementioned exhaustive list of eligible costs which have not been refunded to the taxpayer. Moreover, taxpayers who conduct research and development business and who intend to benefit from the tax credit are obliged to distinguish the costs of their R&D activities in their account books.
The deduction is made in the tax form for the tax year, in which the eligible costs were incurred. If the taxpayer has incurred a loss for the tax year, or the level of revenue is lower than the available deductions, the deduction (respectively the entire sum or its remaining part) is made in the tax forms in the period directly following the mentioned year during the three consecutive tax years, in which the taxpayer benefited or had the right to benefit from the deduction. Taxpayers benefiting from the R&D tax credit are obliged to demonstrate the deducted eligible costs in the CIT-8, PIT-36 or PIT-36L tax forms (depending on the type of the taxpayer).
In order to benefit from the R&D tax credit, in the first place an analysis of the business has to be conducted to identify activities which can be qualified as R&D activities. The next step is to assign costs to the distinguished R&D activities. It is good practice to include the mapped processes in the R&D report for the given year, which will impact the security of benefiting from the R&D tax credit.