After confusion connected with introducing Polish Order to tax law, 2023 seems to be calmer. Both 2022 and previous years show some very favourable solutions in Polish tax law. It seems that the legislator offers them as some kind of ‘compensation’ for the complex tax system. This article presents the most favourable and popular tax solutions for this year. If you want to know what tax optimization in Poland looks like in 2023, this article is for you.

Research and Development Tax Relief (R+D). Tax optimization in 2023

The Research and Development tax relief has been in the Polish tax system for some time. This preference is a tool to stimulate innovation in the Polish economy. It is also a kind of reward for taxpayers investing in research and development. Due to the introduction of the Polish Order, this solution has become more attractive. Let’s see how tax optimization looks when using the R+D relief.

Who can use research and development tax relief?

Entrepreneurs who conduct research and development activities can use R&D tax relief. It is available for entities that settle taxes according to:

tax scale,
flat tax,
corporate income tax.

When it comes to R&D tax relief, the size of the company is not important. Both micro-companies and huge corporations can benefit from it. It enables deducting from the tax base part of the tax-deductible expenses incurred for this activity. These are the so-called eligible costs.

Calculating the amount of R&D tax relief

R&D relief allows PIT and CIT taxpayers to deduct the amount of costs incurred for research and development activities. It cannot exceed the amount of income earned by a taxpayer from a non-agricultural business during a financial year.

The R&D relief allows for deducting a sum that cannot exceed 100% or 150% of eligible costs. The percentage value depends on the taxpayer’s status.

The amount of the eligible costs cannot exceed:

in the case of a taxpayer with the status of R&D centre, who is a micro, small or medium-size entrepreneur within the meaning of the regulations of the Act of 6th March, 2018 – Entrepreneur Law – 200% of eligible costs

in the case of other taxpayers with the status of research and development centre:
100% of the costs of obtaining and maintaining a patent, a utility model protection right, a right derived from the registration of an industrial design,
200% of other eligible costs;

in the case of other taxpayers:
200% of the costs incurred in a given month on account of personnel costs of employees conducting research and development activities
100% of other eligible costs.

Retroactive settlement of R&D tax relief and submission of the corrected tax return

The R&D tax relief may be settled up to 5 years back, by submitting a correction of CIT/PIT declarations. The corrected version may be submitted at any time in accordance with the company’s tax calendar.

To claim R&D tax relief for past years, entrepreneur must follow these steps:

Collect technical documentation and costs of projects that qualify for the R&D tax relief for a specific past tax year.
Submit a special application to the Tax Office to request a refund of overpaid tax.
The Tax Office will make a decision on refunding the overpaid tax to the company.
The Tax Office returns the overpaid tax to the company’s account or leaves it for future tax liabilities. The decision is up to the entrepreneur.

IP BOX tax relief. Tax optimization 2023

IP Box is a tax solution that aims to encourage entrepreneurs from R&D sector to conduct business in Poland. Entrepreneurs from this sector focus on introducing innovations and new technologies in business. Income from the commercialization of intellectual property (IP) rights created, developed or improved as a result of R&D activities or the acquisition of R&D services from others now gains a preferential tax rate of 5%. Let’s see what tax optimization looks like in 2023 with the use of the IP Box relief.

IP Box – what is it?

The IP Box relief means applying a preferential tax rate of 5% instead of standard tax rates (12%, 19%, 32%).

It can be used for income related to activities concerning intellectual property rights. The tax relief covers R&D that led to the creation, development, or improvement of a qualified IP.

What is important, R&D does not have to be carried out by the taxpayer in its own R&D centers. Not every taxpayer has R&D centers within its structures.

Benefiting from the IP BOX relief requires keeping certain records. This is necessary to calculate income from qualified IP.

To calculate income from qualified IP, it is important that these records are kept in a way that enables showing in the annual tax return the total sum of revenue, tax expenses, income, losses, income subject to the 5% tax rate, and income that will not be covered by the preferential taxation. From 2022, the IP Box relief can be combined with the R&D relief.

Who can benefit from the IP Box tax relief?

The IP BOX relief applies not only to natural persons. It doesn’t matter whether you operate as a company or not. The preferential 5% tax rate may be used by all taxpayers who meet the conditions specified in the PIT and CIT Act, including:

entrepreneurs with a sole proprietorship
inherited enterprise,
civil law partnership,
general partnership,
limited liability partnership,
a limited partnership,
limited joint-stock partnership,
a limited company (LLC, simple joint-stock company, joint-stock company)

R&D activity in IP BOX tax relief

R&D activities are creative activities involving scientific research or development work, undertaken in a systematic manner. Their goal is to increase knowledge resources and use them in a new way.

We can talk about research and development activity if:

The activity is creative. It results in a new intellectual product through human creativity.
The activity is systematic. It is conducted in an organized way, according to a system, in a methodical, planned, and organized way.
It is enough to plan and carry out at least one R&D project, assuming specific goals, programme and resources for it. Such activity is considered systematic, i.e. conducted in a methodical, planned and organized manner.
R&D activities increase knowledge resources and lead to new applications. The R&D activities are a set of activities directed to creation, including scientific research (oriented towards new knowledge and skills) and development work (oriented towards the use of available knowledge and skills) to increase knowledge resources to create new, changed or improved products, processes or services. Also in the form of new technologies.

Answering the following questions will determine whether you qualify for the IP Box relief:

Are you a corporate income tax payer or a personal income tax payer due to your business activity?
In what economic sector do you operate?
income generated in 2019, 2020 and 2021 derived from:
payments and receivables resulting from the license agreement
sale of intellectual property rights
sale of a qualified intellectual property right
Did you create, develop or improve in 2019, 2020 and 2021 the following intellectual property rights as part of your R&D activity?
patent
right in registration of integrated circuit topography
copyright to a computer program
none of the above?

Flat-rate tax for capital companies and some partnerships (‘Estonian CIT’)

Last but not least, a solution that dominated the tax advisory services market in Poland. ‘Estonian CIT’ – a lump sum on the income of capital companies and some partnerships. Considering complex and unfavourable regulations introduced by the ‘Polish Order’, the Estonian CIT is an attractive solution. Skillfully implemented, it can lead to significant tax savings without giving up a safe business structure. Let’s see what tax optimization looks like in 2023 with the use of the Estonian CIT.

How to benefit from the Estonian CIT?

You won’t pay CIT on the company’s profit
You won’t pay the solidarity levy
You won’t pay health insurance (at all!)
You’ll pay lower tax when you withdraw your profit

Who can use the Estonian CIT?

The following entities can implement the Estonian CIT:

JOINT-STOCK COMPANY (Polish S.A.)
SIMPLE JOINT-STOCK COMPANY (Polish P.S.A.)
LIMITED LIABILITY COMPANY (Polish Sp. z o.o.)
LIMITED JOINT-STOCK PARTNERSHIP (Polisk S.K.A.)
A LIMITED PARTNERSHIP (Polish Sp.k.)

When is it worth using the Estonian CIT? Tax optimization 2023

When your business generates high income not fully consumed by partners and shareholders.
When your business is expanding and needs funds to invest in fixed assets, goods, technology, and employment.
If your company is about to make a large transaction from which the income must be used without generating tax costs. For example, the sale of valuable property that requires the use of the majority of sum to repay the loan, in order to free the mortgage

On what terms can you enter the Estonian CIT? Tax optimization 2023

Your company’s revenue comes mostly from its operations. Furthermore, its passive income accounts for less than 50% of turnover.
Your company hires at least 3 people for full-time under an employment contract. Alternatively, it incurs employment costs in other forms, equal to at least 3 times the average monthly salary in the enterprise sector and incurs income tax, ZUS, and health insurance costs. In the first year, for a small taxpayer, it corresponds to 1 full-time job and the equivalent of 1 average salary. For a taxpayer in the first year of starting his business, it amounts respectively to 0, then in the second year – 1, in the third year -2, and so on, until the requirement is fulfilled in the 3rd year of being subject to a lump sum tax.
Only natural persons are shareholders or partners of your company.
Your company does not hold any shares (stocks) in the capital of another company. It does not have participation titles in an investment fund or collective investment institution. It also does not have rights and obligations in a company that is not a legal person. Moreover, it does not participate in other property rights connected with the right to receive benefits as a founder or beneficiary of a foundation, trust, other entity or legal relationship of a fiduciary nature.
Your company does not prepare IAS financial statements for the period of the lump sum tax.
Your company does not carry out financial or lending activities as part of its business.
Your company does not benefit from exemptions resulting from the Special Economic Zone (SEZ) or the Polish Investment Zone
You submit a notification about the choice of lump sum taxation to the competent the tax office, according to the established formula

What is the effective taxation under Estonian CIT (PIT+CIT)?

There are two effective tax rates under the Estonian CIT:

20% for small taxpayers (turnover up to 2 000 000 EUR).
25% for taxpayers with a turnover exceeding 2 000 000 EUR.

Only the funds paid out for profit consumptions are subject to taxation. The funds left in the company as undistributed profit remain untaxed. Therefore the effective tax rate may be much lower than those presented above.

Check what will change in Estonian CIT in 2023.

Which business forms to combine with the above solutions to optimize your business? Tax optimization 2023

In 2023 our recommendations for clients will depend on the chosen business models. Since the Polish Order came into effect, there is no one solution that is beneficial for very entity. Regardless of the above, we can assume that:

for “start-ups” we will recommend an LLC or a simple joint-stock company;
for profitable service activities (with low level of investment) we will recommend a limited partnership;
for businesses in which a significant part of income is reinvested, we would recommend an LLC. Preferably together with Estonian CIT

If you find this article interesting and want to know more about the subject, we invite you to cooperate with us. Experts form our law firm in Łódź are eager to support you. Contact us today and let us help you.

Tax optimization in 2023. How to pay lower taxes while running a business in Poland?

Michał Gawlak

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