Benefits of creative work in IT

Legal basis:

• Act on Copyright – Act on Copyright and Related Rights of 4 February 1994 (Journal of Laws of 2022, item 2509),
• PIT Act - Personal Income Tax Act of 26 July 1991 (Journal of Laws of 2022, item 2647),
• General Ruling - General Ruling no. DD3.8201.1.2018 issued by the Minister of Finance on 15 September 2020 with regard to 50% tax-deductible expenses applicable to revenue from copyrightable works.

Applying 50% tax-deductible expenses in IT

The PIT Act grants employees of certain sectors the right to apply 50% tax-deductible expenses (“50% TDE”) to the author’s fee for using or disposing of copyright to works created by themselves. Copyrighted works eligible for the tax credit include designing computer software and games, as well as R&D.

Using the tax credit means that an employee may receive a higher net income with the gross one unchanged, provided, though, that certain criteria have been fulfilled.

Prior to the issue of the General Ruling, the criteria of applying 50% TDE had been unclear. The General Ruling presents prerequisites that, if fulfilled, allow the implementation of 50%TDE in the payroll system. Below we present key legal aspects referred to by the General Ruling with regard to the 50% TDE mechanism.

Not all works qualify for the tax credit

When implementing the 50% TDE, start from identifying employees who produce copyrighted works as part of their employment obligations. However, the production of copyrighted works itself is not sufficient to apply 50% TDE, since these works must result from certain activities performed by an employee as indicated in the PIT Act, including development of computer programs.
 

Thus, two key aspects should be considered when analysing employee’s eligibility:

1. Determining whether the employee has created copyrighted works as defined in the Act on Copyright;
2. Confirming that these works fall into one of the creative work classes eligible for 50% TDE.
    

Copyrighted works include any form of creative work displaying individual features, in any form. Therefore, copyrighted works should have the following characteristics:

1. Be a product of human efforts;
2. Be an object of creative work, i.e. one performed in order to produce new copyrighted works;
3. Bear individual features, i.e. be original and different from other similar products;
4. Be fixed in any form; the form of expression does not matter.

There is no closed list of copyrighted works protected by law, or any fixed criteria deciding what sort of human products should be considered copyrighted works. Quite the contrary, the recent development of new technologies results in rapid changes in classes of products protected by copyright

- Karol Ciszak, Radca prawny, Partner Associate | Deloitte Legal

Decisions of both Polish and foreign courts are of importance in this respect. Importantly, computer software clearly qualifies as copyrightable works in line with the Act on Copyright.

Although the artistic or material value of copyrightable works does not matter in the context of its legal protection, not all products will qualify for such protection. In particular, templates prepared in line with detailed instruction or precise technical requirements are not considered copyrighted works.

The PIT Act does not define the concept of creative work in relation to computer software. Therefore, the question of specific works’ eligibility for the tax credit gives rise to quite frequent doubts. In practice, every production (type of production) requires an individual approach referring, among others, to issued court decisions, doctrine or understanding and specifics of issues in a given IT area.

In principle, considering source codes as copyrightable works resulting from creative work in the field of computer software should not give rise to any doubts. However, apart from source codes, there are other employee products that may fall into this class, such as graphical user interfaces or certain documentation types. Nevertheless, a case-by-case approach is required when checking whether a product displays the above characteristics required by the law.

Transferring copyright to employer

The 50% TDE may be applied provided that the author’s fee qualifies as income from employee’s use or disposal of the copyright on behalf of their employer. This necessitates transferring economic rights from the employee to the employer.

Under the standard transfer model, the economic rights originally pertain to the employee as the author and are transferred to the employer upon the acceptance of the copyrighted works. In this case, it is clear that the economic rights are disposed of on behalf of the employer, which allows the payment of author’s fee and application of 50% TDE.

Article 74.3 of the Act on Copyright introduces an exception from the rule, as according to it economic rights to works produced by employees in the form of computer software are held by employers unless employment contracts indicate otherwise. Therefore, in virtue of law, employers are vested with economic rights to computer software developed by employees at the moment of defining (creating) it. Thus, no transfer of rights from employees to employers occurs, and employees do not receive author’s fee, which means no title to use 50% TDE.

Employment contracts may provide for different treatment of the copyright transfer, though. For example, the parties may agree that economic rights to computer software are not vested with the employer upon the inception of the software but are to be transferred by the employee. In such a case, since the employer has to purchase the economic rights to the software, 50% TDE may be applied.

- Jakub Markiewicz, Adwokat, Senior Managing Associate | Deloitte Legal
 

Determining the author’s fee

Author’s fee is the part of salary payable to an employee for transferring economic rights to copyrighted works produced by them to their employer. Based on the General Ruling, to apply 50% TDE, the author’s fee must be clearly separated from other salary components. This is of importance, since the increased tax-deductible expenses are applicable only to the author’s fee as opposite to the entire salary payable under an employment contract or other remuneration components.

Neither legal provisions, nor the doctrine and court decisions provide clear answers regarding the right manner of determining the author’s fee. The issue is left to the discretion of the parties to the employment contract (freedom of contract principle). According to the General Ruling, though, regardless of the selected method of calculating the author’s fee (whether based on working hours spent, as a separate amount or a percentage share), it must be related to the copyrighted works developed by an employee.

Archiving copyrighted works

Income generated from the use of copyright should be properly documented. Nevertheless, no regulations determine any documentation approach.

A record of copyrighted works developed by employees is an illustrative solution and it may prove useful in case of a tax inspection, if any.

An employer must hold evidence confirming that the copyrighted works for which an employee was paid the author’s fee had been produced and accepted by the employer.
 

Modification of employee documentation

Implementation of the remuneration structure using 50% TDE may necessitate modification of employee documentation (such as employment contracts) or development of appropriate procedures (of accepting copyrighted works and filing them).

- Anna Gajdemska, Aplikantka Adwokacka, Associate
 

They should include provisions compliant with appropriate articles of the Act on Copyright and PIT Act, among others regarding the time of copyright transfer and correct separation of the author’s fee from the pay.

Why is it worth effort?

Although implementing the 50% TDE mechanism and ensuring its compliance with current regulations requires extra human resources and time, it is an efficient tool increasing employer’s attractiveness as perceived by potential and current employees of its IT department.