Polish tax law contains unique regulations on the determination of tax-deductible costs relating to the transfer of copyrights to works that intellectual property owners (“IP Owners”) have already created. IP Owners are defined under Polish intellectual property law as “creators of all forms of intellectual property, with the condition that the result of the creation process must qualify as ’work’,” where ‘work’ is defined as, “each individual creative work, embodied in any form, regardless of its value, designation or medium of expression”. IP owners may apply a preferential 50 percent rate of tax-deductible costs to any income gained from such transfers.
There exist the standard tax-deductible costs which may be applied in 2013 to calculate the income of individuals deriving revenues from an employment relationship in a given month amount to PLN 111.25 (standard costs) or PLN 139.06 (increased costs), irrespective of the employee’s salary. On the other hand, the rules related to independent contractors generating income from mandate agreements are slightly more beneficial. Their revenues may be diminished by tax-deductible costs calculated as 20 percent of revenues.
From this perspective, the 50 percent rate of tax-deductible costs seems to be a good starting point for IP tax planning, though beginning in 2013, if the 50 percent rate is applied, the total tax-deductible costs incurred in a given tax year in relation to copyrights may not exceed one half of the amount representing the upper limit of the first tax bracket. In 2013, this limit amounts to PLN 42.764.
The preferential 50 percent rate of tax-deductible costs may be applicable whether the legal relationship under which the IP owner transfers the copyrights is an employment relationship, mandate agreement or other contract. However, to apply the 50 percent rate, the revenue must be gained for the creation and transfer of a copyright to a piece of “work” protected by copyrights, as understood under Polish IP law. Thus, it is essential to properly qualify the individual’s activities and the result of such activities.
The determination as to whether or not a given effect of intellectual activities is in fact “work” must be made based on factual analysis, and not only by the decision of the parties to the contract. It is important to note that in order to verify whether a “work” was created, one should analyze the end result of the given intellectual activities, and not the character of the activities as such. Consequently, it is not possible to determine in advance whether concrete works of an employee will be regarded as “works” under Polish IP law. Of course, there are certain groups of products created as a result of intellectual activities that are usually presumed to meet the requirements of the “work” definition (e.g., computer programs) and others which are regarded as not meeting those conditions (e.g., court pleadings), but in practice, the analysis should always be made on a case-by-case basis.
IP tax planning based on the above regulations may require the introduction of a specific type of salary system in relation to a company’s employees, under which the chosen employees could obtain their salary as two separate parts. The first part would be the base salary, to which the standard tax-deductible costs would apply. The second part would be the salary from the transfer of IP rights to works created by the employee, to which the more beneficial 50 percent tax-deductible costs could be applied.
Such restructuring of employee salaries may result in significant tax savings because the beneficial effect of using 50 percent tax-deductible costs is reflected in two concurrent areas. First, the final tax base from which tax is calculated is lower as a result of the deduction of a higher amount of costs. Second, note that in Poland, employee income is taxed on a progressive tax scale, with two tax rates: 18 percent and, starting from the tax base level of ca. PLN 85,000 annually, 32 percent. If the preferential 50 percent tax-deductible costs are deducted, the moment in a tax year from which the 32 percent tax rate is applicable to the employee’s income is delayed. Consequently, from the perspective of the whole tax year, the 32 percent tax rate is applied to a lower amount of income, as compared to the situation when preferential costs are not used.
To demonstrate the amount of savings that may be achieved with the application of such IP tax planning, suppose we have two employees whose monthly salary is PLN 12,000 (for the purpose of clarity, we will ignore the social security contributions for this example). The first employee does not enjoy preferential tax-deductible costs and starting from the eighth month of the tax year, pays 32 percent income tax. His annual income tax burden will amount to ca. PLN 33,400. The other employee’s salary is also PLN 12,000, but his salary is divided into two equal parts, the first part being a base salary relating to standard activities and the second part relating to the creation of “works” as understood by Polish IP law. Accordingly, the second employee is allowed to benefit from the 50 percent tax-deductible costs in relation to the second part of his salary. Consequently, for the second employee, the application of the 32 percent tax rate to his income is delayed and starts from the tenth month of the tax year. Taking into consideration his whole salary, the final annual income tax burden of the second employee amounts to ca. PLN 28,000. Consequently, the tax saving in such situation in relation to one employee with a monthly salary of ca. PLN 12,000 is ca. PLN 5,000 annually if the discussed scheme is applied. If the tax planning is successfully implemented for a group of employees, the tax savings will be even greater.
In order to increase the degree of safety for both the employee and the employer, the implementation of the discussed structure in a company should focus on the diversification of the employees’ intellectual activities and the identification of which of them may be qualified as resulting in an effect that is both creative and individual and would be preserved in some form (e.g., in writing). In light of the already mentioned difficulties arising from the application of the definition of “works” under Polish IP law, when implementing the discussed structure, the major focus should be on the development of detailed company procedures regarding this issue.
In particular, the procedures should introduce comprehensive methods of verification whether in each particular case the result of an employee’s intellectual work may in fact be qualified as “work” under IP law, thus qualifying for preferential 50 percent tax-deductible costs. The procedures should ensure that the results of employee activities would be analyzed on a case-by-case basis, not automatically or in advance. For instance, a special permanent committee could be established, which would analyze the intellectual products delivered by employees from the perspective of their qualification as “works”, based on the relevant IP law criteria, and which would eliminate the works not demonstrating sufficient creativity or individuality.
It would be unusual for an employee to deliver only works qualifying for the application of 50 percent tax-deductible costs. Consequently, it is important that the internal procedures and employment documentation specify how the salary of the employees qualifying as IP owners of “works” is calculated, and how the parts related to copyrights are distinguished from each other. From a technical point of view, such division into two different types of salaries could be achieved in different ways, e.g., by ongoing (monthly) determination of the value of created works, a flat percentage of the employees’ revenues connected with the “works”, or salary for the expectation right to acquire copyrights for the works that may be created in a given settlement period.
All the described procedures should serve to protect not only the employees, but also the position of the employer, who acts as a tax remitter with respect to the employees’ income and is responsible for the accuracy of the collected and remitted income tax advances.