On 3 January 2019 the Ministry of Finance announced on its website the launch of public consultation on the applicability of the 50% rate of tax-deductible costs. The draft document published by the Ministry is an opportunity to put an end to the uncertainty that continues to cloud the preferential rate eagerly used by many employers in the IT industry.
The current legal situation
Article 22(9b) of the Polish Personal Income Tax (PIT) Act provides for applicability of a 50% rate of tax-deductible costs on account of carrying out certain types of work. This favorable rate may be used with respect to employees who create works (as defined in the relevant copyright laws) in the areas of activity exhaustively listed in the provision (e.g. developing computer software, and research and development activity) and receive payments – as part of their base salary – for transferring the copyright of their work.
In practice, the primary benefit of applying the preferential tax-deductible costs scheme boils down to a reduction in the advance income tax payments and the corresponding increase in the employee’s net pay.
Previously, the statutory conditions on applying the 50% rate were subject to interpretation by the heads of regional tax offices. More recently, individual tax rulings have been issued by the Director of the National Tax Information Service (Polish: Krajowa Informacja Skarbowa, KIS).
Although for several years the tax authorities used to maintain a uniform approach, admitting different methods of calculating the remuneration payable to an employee for transferring his copyright (including the most widely used percentage method), around a year and a half ago they started to challenge applications presenting further models (some already in us, others about to be implemented) for approval and give mostly negative rulings. At the same time, the Director of KIS has offered no advice as to the correct – in his view – method of calculating the copyright-based component of employees’ pay. This shift in the approach of the Director of KIS is discussed in detail in another blog entry by the same authors – see http://traple.pl/blog/zmiany-w-rozliczaniu-50-kosztowuzyskania-przychodow/, available only in Polish).
While in the last few months the authority has relaxed its position somewhat (it has started making positive rulings too, though these are still scarce), its specific interpretations are rather inconsistent and far from uniform. Hence the Minister of Finance’s proposal to formulate a general tax ruling in the above area is definitely a laudable initiative as it may serve to alleviate the legal uncertainty experienced by both employers and employees who create copyright works in the context an employment relationship.
What is a general tax ruling and what are its legal effects?
According to the provisions of the Polish Tax Ordinance Act, the general tax ruling is an instrument used to ensure uniform application of the tax laws by the authorities. In practice, contradictory rulings are sometimes made in analogous cases. In such circumstances the Minister of Finance may step in and issue – either ex officio or upon request – a general tax ruling that provides guidelines on compliance with specific tax laws and interprets those laws.
It is particularly important that a general ruling not only promotes consistent application of the regulations by tax authorities, but also affords legal protection to the taxpayer – the Tax Ordinance Act stipulates that compliance with a general tax ruling may not be detrimental to the compliant party as taxpayers and tax remitters may not suffer negative consequences of acting in accordance with the guidelines set out by the Minister of Finance in a general tax ruling. In this respect, tax rulings enhance legal certainty and stability.
It ought to be kept in mind, however, that the document unveiled by the Minister of Finance on 3 January 2019 is merely a draft ruling. It thus confers no legal protection until it has assumed final form.
Main conclusions from the analysis of the project
The draft ruling proposed by the Minister of Finance on 3 January 2019 stipulates clearly that:
“An employer may determine the amount of remuneration payable for transfer of copyright as a fixed sum or percentage of the base salary; this remuneration must be linked to a particular copyright work or works created under an employment contract.”
It seems to follow clearly that determination of the amount of remuneration for transfer of copyright is an open issue between the employer and the employee. Since the legal provisions refrain from laying down any specific requirements, none should be imposed by the Director of KIS. It appears that in the light of the draft ruling proposed by the Minister of Finance, the widespread practice of defining the amount of copyright-based remuneration as a percentage of the base salary should not raise any objections.
Another crucial extract concerns demonstrating that an employee created specific copyright works and, consequently, that the employer had sufficient grounds to apply the 50% tax-deductible costs scheme with respect to the employee’s copyright-based remuneration. The Minister of Finance states in the proposed ruling that in order to apply the scheme the employer must
“have objective evidence showing that the employee created the work subject to copyright law; a statement by the employer and the employee that creative work was carried out may constitute such evidence provided that it identifies the work created.”
The above seems to address the IT sector’s concerns relating to the obligation to prove – in the event of a tax inspection – that the 50% tax-deductible costs scheme was applied correctly as the employee created a specific work in a given month. Taking into account the tax authorities’ right to verify tax returns and settlements going back a few years, IT employers feared they would have to retain each such work until the termination of the corresponding tax liability. Confidential information and trade secret processes also played a pertinent role, as the employers were reluctant to submit such works for inspection.
The draft ruling proposed by the Minister of Finance appears to settle these issues: it will be sufficient for the employer to keep a clear record of copyright works needed to show an unambiguous connection between works created in a particular tax period, their author (an employee), and the remuneration paid for transfer of the copyright.
It is also welcome news that the Minister of Finance has recognized the distinction between the acquisition of original ownership of copyright in computer software developed under an employment contract and acquisition of subsequent ownership of copyright in other works created under such a contract. Though crucial to the applicability of the 50% tax-deductible costs scheme, this distinction has not always been identified correctly by the Director of the National Revenue Information Service or, indeed, by employers, who have often erroneously relied on Article 74(3) of the Polish Act on Copyright and Related Rights (ACRR).
There can be no doubt, however, that the 50% costs scheme may be applied in the case of software development and transfer of copyright in the software to the employer, though before it is applied many employment contracts will need to be modified with respect to the rule of said Article 74(3) ACRR so as to confirm that the employer does not acquire original ownership of the copyright in the works created by the employee, but rather the latter transfers the copyright to the former. The Minister of Finance has pointed out that this is one of the key requirements for the application of the 50% costs scheme.
Nonetheless, it still seems that the draft ruling is not free from inaccuracies or ambiguities which may give rise to divergent legal interpretations. The provision concerning the employee’s holiday pay is a case in point – the Minister suggests that it should be treated as advance pay and hence qualify as eligible for the 50% costs scheme. However favorable to taxpayers, this proposal needs to be elaborated before it can be applied in accordance with the provisions of the Labour Code.
In summary, the draft ruling establishes the following conditions for applying the 50% tax-deductible costs scheme:
- as a result of carrying out an activity listed in Article 22.9b PIT Act, an employee, within the employment relationship, creates a copyright work (as defined in ACRR) and the employer accepts the work;
- the copyright in the work is transferred to the employer in return for a lump sum payment;
- the creation of the work is documented;
- the payment made for the transfer of the copyright is set clearly apart from other components of the employee’s remuneration
It must be stressed, though, that the above conclusions apply only to the draft ruling. As the project is about to undergo public consultation, its final wording may render some of our observations invalid.
Impact of the ruling on the IT industry
Given the uncertainty surrounding application of the 50% costs scheme, the Minister’s initiative to issue the general ruling comes as welcome news, in particular due to its great practical importance. The fact that the proposal is being put to public consultation is also commendable.
It is worth noting that the draft ruling directly addresses the sector’s concerns with respect to the rules for determining the amount of remuneration paid for transfer of copyright, which have been the source of the most controversy. Assuming that the proposals put forward in the project are retained in the final version of the ruling, employers who apply the 50% tax-deductible costs scheme will be able to act with legal certainty as long as they comply with the directions of the Minister of Finance.
The decision to hold public consultation so as to ensure that all the stakeholders concerned can have an influence on the final shape of the ruling is also very constructive. It may be hoped that their involvement will help resolve any doubts or ambiguities in the draft document.
We therefore encourage contributions to the public consultation – they must be submitted to the Minister of Finance by 18 January 2019.
The draft ruling (available in Polish) may be downloaded from https://www.mf.gov.pl/ministerstwofinansow/dzialalnosc/konsultacje-podatkowe/-/asset_publisher/M1vU/content/zawiadomienie-orozpoczeciu-konsultacji-podatkowych-w-zakresie-projektu-interpretacji-ogolnej-dotyczacejmozliwosci-zastosowania-50-kosztow-uzyskania-przychodow-do-czesci-wynagrodzenia-uzyskanegow-ramach-stosunku-pracy-z-tytulu-rozporzadzania-prawamiautorskimi?redirect=https%3A%2F%2Fwww.mf.gov.pl%2Fministerstwofinansow%2Fdzialalnosc%2Fkonsultacjepodatkowe%3Fp_p_id%3D101_INSTANCE_M1vU%26p_p_lifecycle%3D0%26p_p_state%3Dnormal%2 6p_p_mode%3Dview%26p_p_col_id%3Dcolumn2%26p_p_col_count%3D1#p_p_id_101_INSTANCE_M1vU