Tax Alert, July 2019
Rulebook on conditions and methods of exempting the qualified income from the corporate income tax base
On 9 July 2019 Minister of finance has issued Rulebook on conditions and methods of exempting the qualified income from the corporate income tax base (hereinafter: “Rulebook”), which comes into force on 20 July 2019, and applies to corporate income tax calculation as of 2019.
Rulebook prescribes the application of Article 25b of the Corporate Income Tax Law (hereinafter: “Law”), which provides for a possibility to exempt income from the right to use registered copyright or similar rights (hereinafter: “copyright”) or patents, from the corporate income tax base.
The Rulebook more closely specifies the method of calculating the qualified income, the right to use the exemption, documents that the taxpayer should possesses. The Rulebook introduces new form – OKP form – form for the calculation of qualified income – which will have to be filed with the tax balance sheet, in case of application of exemption.
Please find below a short overview of the most important provisions of the Rulebook.
Who is entitled to exempt the qualified income?
Each taxpayer – who holds the rights to a registered copyright, patent or has filed patent applications, and derives income from the right to use the registered copyright or patent, and who, at the latest by the end of the tax period in which applies the exemption for the first time, registers such copyright or files the patent registration with the competent authority.
Taxpayer that has filed the patent application:
1. Losses the right to exempt the qualified income from the tax base as of the tax period in which his patent application has been rejected by the competent authority.
2. Losses the right to exempt the qualified income from the tax base as of the tax period in which his patent application has been declined by the competent authority, and is obliged to increase his tax base in that tax period for the total amount of all exemptions used in the previous tax periods.
1. Registered copyright for the purpose of exempting the qualified income from the tax base encompasses all non-registered adaptations of the originally registered copyright, provided that the taxpayer registers subsequent adaptation of the originally registered copyright until the deadline for filing the corporate income tax return, and such original copyright and all adaptations, including the registered adaptation, contain characteristics of the registered copyright – which is important for industries whose copyrights are often adapted, and which would have an unreasonable administrative burden, if each adaptation would be registered.
2. Taxpayer that loses the status of patent holder, based on the expiration of the period of protection, loses the right to apply the Article 25b of the Law as of the tax period in which loses its patent holder status.
How is the qualified income to be exempt from the tax base calculated?
Qualified income is assessed for a tax period in the following way – amount of total income from granting the right to use the registered copyright derived in that tax period is decreased by the amount of qualified expenditures, and then multiplied by the percentage that shows the participation of qualified expenditures in total expenses incurred with regard to that copyright. Qualified income determined in this way is exempt from the tax base in the amount of 80%.
If the amount of qualified expenditures in the first tax period higher than the amount of total income, total income will be decreased up until 0, and in the second and any subsequent tax period, the amount of qualified expenditures will decrease the amount of total income (up until 0), only in the remaining amount that was not used to decrease the total income in previous tax periods.
Qualified expenditures are total historical or current tax deductible expenses related to the research and development activities which have resulted in creation of the registered copyright or patent – which expenses are expenses related to R&D activities is determined in line with the Rulebook on conditions and methods for deducting the R&D expenses in the double amount in the tax balance sheet, regardless whether the taxpayer applies the incentive from the Article 22g of the Law.
Additionally, in case the registered copyright acquired through mergers or contribution in kind to the equity, taxpayer takes into account qualified expenditures of the transferor.
Total expenses are total qualified expenditures increased for various expenses – including – R&D expenses which were incurred from a non-resident, part of the expenses incurred from transactions with related parties which is not at arm’s length, etc. – please note that if such expenses are incurred both regarding the registered copyright and some other purpose, only the proportional part of expenses is included in the total expenses.
Special rules exist for taxpayers which have registered the copyright/filed the patent application after 1 January 2019, but have had fixed asset/intangible property/ registered in their books as at 31 December 2018, or have derived income from copyright patent – standardized historical tax deductible expenses are prescribed:
1. 60% of the total income in the first tax period.
2. 40% of the total income in the second tax period.
3. 20% of the total income in the third tax period.
Taxpayer that uses standardized historical tax deductible expenses, records current expenses the same way as any other taxpayer applying the Article 25b. It is important to note that standardized historical tax deductible expenses are not taken into account for the calculation of percentage of qualified expenses in total expenses, but only qualified expenditures and other costs incurred after 1 January 2019.
Which documentation the taxpayer needs to possess in order to apply the exemption?
The Rulebook prescribes mandatory documentation which the taxpayer has to posses in order to apply the exemption, and such documentation is prepared separately for each copyright/patent, in each tax period in which the exemption is applied. Documentation encompasses a number of documents such as – confirmation from the competent authority for protection and registration of the copyright/patents, contracts and invoices regarding granting the right to use the copyright/patent, contracts and other documents regarding the qualified and total expenses, etc.
In addition, the taxpayer is obliged to prepare:
1. Records of income derived from the compensation for the right to use registered copyright/patent – which needs to be mapped to the business books, i.e. the taxpayer needs to specify the accounts in which such income was recorded.
2. Records of the total expenses in relation to the research and development activities which have resulted in creation of the register copyright/patent, and which needs to contain information which of these expenses are qualified - which needs to be mapped to the business books, i.e. the taxpayer needs to specify the accounts in which such expenses were recorded
Notwithstanding the above, taxpayer that uses standardized amounts of qualified expenses, is not required to own such documentation for the amount of standardized qualified expenses.
Taxpayer needs to prepare and possess the documents in the moment of filing the tax return, and delivers it to the competent tax authority, at request.