Application of R&D tax relief in a consulting services company
In the judgment of March 7, 2024, ref. no. II FSK 753/21, the Supreme Administrative Court (NSA) addressed the issue of the application of the R&D tax relief in a consulting services company. This ruling holds significant importance for companies operating in this industry and benefiting from this tax relief.
The taxpayer’s situation
In the application for an individual interpretation, the taxpayer described his sole proprietorship, which included consulting in the area of functional safety, reliability of the automotive industry sector, automation, artificial intelligence, as well as geodetic activities. In 2019, they employed workers under various contracts and collaborated with entrepreneurs, for which they incurred appropriate costs, including salaries.
The taxpayer’s activities included the use of current knowledge and skills, including IT tools, to design and create new, improved, or modified products, processes, or services. All projects were carried out for other companies’ project departments engaged in designing, creating, or developing new products.
In the interpretation request, the taxpayer indicated that the costs of research and development activities include all elements of remuneration of employees and contractors, except for surveying activities, which were performed on a commission contract. Travel costs were strictly related to R&D activities, including flights, accommodation, and other related expenses, with allowances based on legally prescribed rates.
The following questions were asked in the request:
- Can the taxpayer’s 2019 activities be considered R&D, excluding geodetic activities?
- Are the costs of remuneration of employees under employment contracts and contracts for specific work eligible costs in accordance with Art. 26e of the Personal Income Tax Act (u.p.d.o.f).?
- Are all travel expenses eligible expenses in accordance with Art. 26e section 2 u.p.d.o.f.?
- Does the maintained record meet the legal requirements of Art. 24a section 1b u.p.d.o.f.?
The taxpayer claimed that all of his activities, except geodesy, qualify as R&D. Moreover, he believed that employee remuneration costs were fully qualified eligible, and that all travel expenses meet the criteria for eligible costs. The taxpayer also stated that his records meet the requirements of Art. 24a section 1b u.p.d.o.f.
Interpretation of the Director of the National Tax Information
The interpretive authority found that some of the taxpayer’s, activities, such as the creation of new innovative products or innovative improvements of existing products, fall within the definition of research and development. However, activities such as developing new applications for products, auditing, certification, publication of scientific articles, technical supervision, creating analyses and concepts, presentations at symposia, and conducting workshops do not meet the criteria of R&D activities.
If a person performing tasks on the basis of an order or a work contract does not only participate in research and development activities, the portion of the remuneration and benefits paid to the employee for his or her participation in research and development should be separated and corresponding contributions are filtered out in accordance with social security regulations.
The interpretive body clarified that working time devoted to R&D refers to the actual time dedicated to the implementation of these tasks. Therefore, the amount of remuneration and contributions paid proportionally for days of an employee’s absence, such as vacation pay or sick leave, are not deductible.
Expenditures on per diem and other expenses related to business trips are partially eligible costs if they are related to R&D tasks and are payable on behalf of the individuals involved.
The taxpayer filed a complaint against the individual interpretation issued by the Director of the National Tax Information Interpretation on July 2, 2020, under reference number 0114-KDWP.4011.5.2020.2.LZ.
Judgment of the Provincial Administrative Court
In the judgment of December 15, 2020, the Provincial Administrative Court in Warsaw invalidated part of the contested individual interpretation, which incorrectly referred to the development of new applications and working time.
The court confirmed that activities such as client certification, publishing and presenting work results, or preparing technical reports are not considered research and development (R&D) activities but rather elements of consulting activities. The court also found that the development of new applications for existing products or new technical solutions, provided they are innovative, may be considered as development work, as they may lead to the creation of new procedures.
As for costs, the taxpayer incorrectly separated R&D costs, based on the assumption that he separates them if he separates geodetic costs. The presented records did not refer to costs that do not need to correspond to the number of hours worked on a task, and in the facts of the case, the taxpayer did not indicate that co-workers have fixed rates that are not subject to differentiation depending on the type of tasks performed.
The court agreed with the taxpayer, pointing out that the overall total work time of an employee in a given month cannot include vacation time, sick leave, days off for childcare, or other absences from work.
Both the Director of the National Tax Information and the taxpayer filed a cassation appeal against the ruling of the Provincial Administrative Court.
The Supreme Administrative Court comprehensively assessed the legality of the contested judgment.
Judgment of the Supreme Administrative Court
The Supreme Administrative Court in Warsaw agreed with the judgment of the Provincial Administrative Court. According to the NSA, the first-instance court conducted a correct analysis of the legal provisions defining the concept of research and development (R&D) activities and indicated the criteria that determine such activity.
According to the court, activities related to the transfer of work results, which are a form of creative activity, do not qualify as development activities. If the taxpayer performs other activities that are not related to research and development, they should be included separately in the records.
An employee’s working time dedicated to performing research and development work in a given month cannot proportionally include vacation time, sick leave, childcare leave, or other absences from work.
When determining the “total working time”, the proportion should be determined, where the numerator includes the time devoted to creative activity, and the denominator includes the total working time. The concept of overall working time in this context does not take into account employee absence and remains constant.
Both appeals against the judgment were dismissed.
In summary, taxpayers who deduct R&D expenses should carefully review their time tracking and accounting systems to ensure they accurately monitor and allocate their expenses.
It is worth remembering that an individual interpretation of tax regulations has legal consequences only when the actual facts of the interpreted case coincide with the facts reported by the taxpayer in the application for an interpretation. If any element contained in the application is changed, the provided answer becomes out of date. The procedure for issuing individual interpretations is not subject to tax or audit proceedings. The authority relies solely on the information contained in the application, without conducting evidentiary proceedings. Determining the actual state of affairs falls within the competence of any potential tax proceedings or inspections.
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