The Innovation Box, a new tax incentive scheme implemented by the Polish government, was signed into law by President Andrzej Duda on 14 November 2018. Developed as a way to stimulate and reward research and development projects, the Innovation Box was part of Poland’s 2019 Budget: specifically Articles 24d and 24e of Law No.2860. In effect since 1 January 2019, the Innovation Box essentially introduces a preferential 5% tax rate for income sourced from intellectual property rights - if that property meets qualified conditions.
Poland’s government is hoping the Innovation Box will revolutionise the country’s tech and R&D landscape, reducing the tax burden for entrepreneurs, scientists, and researchers, and providing an incentive to pursue innovative commercial activities. In order to take advantage of the advantages the Innovation Box offers, employers in Poland must get to grips with the details of the regime.
Qualifying for the Innovation Box
The 5% preferential tax rate applies to both corporate and personal income tax. The intellectual property rights which qualify for Innovation Box tax treatment cover:
- Patent rights
- Protection rights for utility models
- Rights from the registration of Industrial designs
- Rights from the registration of integrated circuit topography
- Rights from the registration of medicinal and veterinary products (authorised for market)
- Rights from the registration of new varieties of plant or new animal breeds
- Protection rights for medicinal product patents
- Rights to computer software
Intellectual property rights only qualify for Innovation Box treatment if they are already subject to certain legal protections, such as ratified international agreements to which Poland or the EU is party.
Establishing Intellectual Property Income
Income classified as being derived from intellectual property rights broadly refers to the following:
- Royalties or similar fees due under licensing agreements
- Sale of a qualifying intellectual property
- Sale of products and services which include embedded intellectual property
- Legal compensation for the infringement of intellectual property rights
Calculating Innovation Box Tax
The income which is subject to the preferential tax rate offered under the Innovation Box regime is calculated using a formula recommended by the OECD - known as the ‘nexus’ approach. The formula is specifically designed to help taxpayers who put effort and finances into developing their own intellectual property rights: the greater the amount of effort and time put into research and development, the more significant the tax relief offered by the Innovation Box.
Under the new legislation, Innovation Box tax treatment is voluntary but taxpayers seeking to apply it must separate intellectual property income from other types of income in their accounting records. The records must include both gains and losses which are derived from intellectual property.
Attracting Investment in Poland
The introduction of the Innovation Box regime comes at a time when Poland is trying to stimulate business interest and investment from both domestic and foreign sources - in particular from organisations operating in the technology sector. A recent report identified Poland, along with Ukraine, Belarus, and Romania as a hotspot for tech talent - with a combined export of $13 billion in the software development market in 2018. Furthermore, the report suggested that the the R&D market in those countries is growing at up to 25% per year - much faster than the global average of 5%.
Employers in Poland who wish to use the Innovation Box tax incentives should first analyse their current internal strategy for handling innovation and intellectual property rights - and how they handle the income derived from those sources. Practically, this will involve using transfer pricing techniques to determine income which qualifies and, of course, keeping and maintaining appropriate records of intellectual property income.
For more information on tax relief and incentives in Poland, explore activpayroll’s dedicated Global Insight Guide to Poland.