Context: As an IT recruitment agency in Poland we often receive questions about the ins and outs of the so-called “copyright costs”. We are blessed to have a great legal partner in JWMS who wrote an excellent review of the most recent general interpretation project. Do not hesitate to get in touch with Jan Marczyński and Kamil Blicharski if you require more information.
On January 3, 2019, the Ministry of Finance published a general interpretation (tax ruling) project on its website regarding 50% of the tax-deductible costs. Until 18 January 2019, consultations were to be held regarding the content of the general interpretation and soon we should be presented with the final version.
This interpretation is intended to clarify doubts in many issues that have been subject to different legal opinions. They concerned the possibility and method of applying 50% of the tax-deductible costs for programmers’ salaries. As JWMS, we have been dealing with the presented problem for over a year advising our Clients.
50% tax-deductible costs for programmers – legal regulation
At the outset, we present a brief explanation of where the problem of applying 50% tax deductible costs for programmers came from and what it is about.
As is known, every employer as a part of an employment relationship pays salaries to employees. However, the net remuneration paid to the employee to the bank account is not equal to gross pay. Before paying a salary to an employee, every month the employer as an income taxpayer has to calculate, collect and pay an income tax advance per employee to the tax office. The employee does not pay the advances himself, but it obviously reduces his remuneration, which he receives for each month of work. Income tax, as well as advances from it, are paid on income, meaning employee’s income (basic pay, overtime pay, various allowances, prizes, equivalents for unused vacation, etc.) minus tax-deductible costs and social security contributions.
Therefore, to determine what tax the employer has to pay to the tax office for the employee and also what net remuneration the employee should receive it is crucial to know what tax-deductible costs can be deducted from the employee’s income.
The principle regarding the majority of employees is that an employer may deduct a fixed and fairly small amount from the employee’s income each month as part of the tax-deductible costs. It amounts to 111,25 PLN or 139,06 PLN per month depending on how many workplaces pay the salary to the employee. This amount is a lump sum (always the same – regardless of the salary). The law “assumes” that this covers standard costs of an average employee per month related to employment (for example, the employee’s expenses for a bus ticket to work).
However, the Polish Personal Income Tax Act allows authors of copyrighted works to receive royalties or remuneration for transfer of the copyright may apply tax-deducible costs in the amount of 50% of earned income. The lawmakers assumed that author must spend at least 50% of their earnings to create a copyrighted work and that artists should not be forced to collect all the invoices and receipts to prove that they paid for materials and services needed to create the copyrighted work.
Not all creators may enjoy this particular right – there is a list of types of creative works that it applies to (that includes among other computer programs, music, scientific literature).
This regulations typically apply to freelancers working according to “specific work agreement” (umowa o dzieło) or services agreement (umowa o świadczenie usług / umowa zlecenie).
However, the question is – can this regulation apply to the salary of employees that created copyrighted work?
Quite often this regulation is applied to university workers, graphic designers and software developers that are employed. However, it is not without controversy. As this matter is not extensively regulated, there were many different approaches and the tax authorities changed their mind from time to time.
Many wiser employers, expecting that the tax authorities may change their mind about this issue, applied for tax rulings. While for some time the rulings issued were pretty much the same, recently tax authorities started to issue rulings with a different interpretation of the law. Often they declined the right to apply 50% tax deductible costs unless additional requirements were met, usually requiring more specific proofs about time spent on the “creative work” or specifying an amount of money to each copyrighted work.
What the tax authorities always expected was a clear division of the salary into two parts – “salary for creative work” and “salary for other work”.
The problem was how to divide it. For example – for long time tax authorities agreed that merely indicating that a specific part of the salary (e.g. 70%) is “salary for creative work” is enough to apply tax-deductible costs to this part of remuneration. Then they said that such “abstractive” division is not enough. They demanded to base the division between salary for “transfer of copyrights” and “salary for other work” on timesheets. Moreover, then after some time, they decided that it makes no sense, as time spent on the creation of something does not have to affect the value of the result.
Acceptance of various solutions for some time in individual interpretations issued to employers was still somewhat an official practice than a legally regulated matter and to paraphrase specific idea – what can be asserted without a clear legal basis can also be dismissed without a clear legal basis.
This all leads to the point where we are now – general interpretation of tax law – a document issued by the Minister of Finance that is pretty much equal to binding law (except that the taxpayer may challenge it to the court trying to change the interpretation for their favour).
Conclusions from the general interpretation project
The Ministry of Finance is trying to fix the problems mentioned above and on January 3, 2019, published on its website a project of the general interpretation regarding 50% of the tax-deductible costs.
The general interpretation project published by the Ministry of Finance tries to explain exactly how to calculate the author’s remuneration to apply the increased tax-deductible costs correctly. In large, the project maintains the position of tax authorities presented so far. From the project of general interpretation it follows that:
- There must be a specific effect of the creative work and copyrights to this effect must be transferred to the employer (so the employer must prove not only that the employee “was creating something” but also that they “have created something”),
- The creation of the work within the meaning of the provisions of the Copyright Act is to be proved by “objective evidence confirming that employee created the work that is subject to copyright”, which may be a “statement by the employer and employee stating that a creative work was performed, if it defines which work was created” . The definition of “objective” evidence, who will decide on it and what if the evidence turns out to be not objective remains open and seems to require clarification. In particular, it is postulated to specify what specific documents should be needed to prove the creation of the work.
- Copyrights must be transferred and not belong to the employer at the moment when the work is created (this issue depends on the specific wording of the employment contract).
- According to the project, “the employer may apply a quota or percentage of the author’s fee in relation to the basic salary, except that the fee must be linked to the specific work (works)” – this would a comeback to interpretation accepted some time ago, which was more lenient than the current one.
- According to the project, even if in the particular month no creative worked was created the 50% costs may apply as the salary may be treated as payment for work made in another month (e.g. equivalent to an upfront payment for the works finished next month).
Employees organisations requested clarifications of some of the issues above, as they are not presented in the project clearly (e.g. what would be sufficient proof that employee created particular copyrighted work).
Consequences of general interpretation
The idea of the general tax ruling is that it’s supposed to unify interpretation of the law and it aims to prevent contradictory decisions. If the taxpayer follows the interpretation then they cannot bear any negative consequences of, e.g. not paying particular tax.
The new general ruling should clarify some of the doubts. However, we must wait for the final text to be sure whether it is clear enough to be helpful.
For those who got their individual ruling, it is important to note that if the ruling is contradictory with the general ruling, then Director of the National Tax Information (Krajowa Informacja Skarbowa) may declare that such individual ruling expires.