Revolution in the IT market? IT specialists and programmers face higher tax on copyright royalties.

On 15 September 2020, the Minister of Finance issued a General Interpretation concerning the application of the 50% tax-deductible costs to copyright royalties (no. DD3.8201.1.2018; Official Gazette of the Ministry of Finance of 18 September 2020, item 107). The content of the document clarifies, among other things, the rules for determining the amount of copyright royalties and the process of the transfer of copyright from the employee to the employer.

A statement on the Ministry’s website explains that, pursuant to Article 22(9)(3) of the Act of 26 July 1991 on Personal Income Tax, tax-deductible costs related to income earned by authors from the use of copyright and performers from related rights, as defined by separate regulations, or from the disposal of these rights, amount to 50% of the revenue earned. These costs are calculated from the income reduced by the pension, disability, and sickness insurance contributions withheld by the payer in the given month, provided that the income constitutes the basis for those contributions.

The aim of the issued interpretation is to outline the conditions which, when met, enable the application — including by the income tax payer (e.g. the employer) — of the 50% tax-deductible costs to income derived from the use or disposal of copyright by authors.

The conditions listed in the interpretation stipulate that, for the 50% tax-deductible costs to apply to income derived from the use or disposal of copyright and related rights, the copyright royalty must be clearly distinguished from other components of remuneration, and a work must be created within the meaning of the Copyright Act — i.e. a work that is commissioned, expected by the employer, original, and of an individual nature.

The fact of earning income from copyright and its amount must be appropriately documented, which may be demonstrated by any legally admissible evidence. Furthermore, the calculation of the copyright remuneration may be based on the time an employee–author spends creating the work. In such cases, the time spent on creative work must be recorded, along with documentation in the form of a register of created works.

A specific situation arises if the work is not created, and advances on tax for the royalty portion of the remuneration were calculated using the 50% tax-deductible costs — for example, if an employee leaves their job or a civil-law contract is terminated. A fundamental principle of income tax is the principle of self-assessment. Therefore, it is the taxpayer’s responsibility to correctly determine their income, account for tax-deductible costs in the proper amount, and calculate the tax due.

In such a case, the employer or other entity paying a portion of the due royalty is not obliged to correct the amounts of advances paid, since they were paid in the correct amount at the time (based on the assumption that the commissioned work would be delivered). Moreover, the employer is required to report in the annual PIT-11 statement the tax-deductible costs actually applied when calculating the tax advances.

However, if in the annual PIT-4R declaration the employer reported income applying the 50% tax-deductible costs (and the work was not created), then the correct amount of tax advances due was not reported, and the employer is therefore obliged to amend this declaration.

The interpretation also includes a reminder regarding the legal status of a work created by an employee. Unless otherwise stipulated by law or the employment contract, the employer for whom an employee creates a work in the course of their duties acquires the economic copyright to the work at the time of its acceptance, to the extent defined by the purpose of the employment contract and the mutual intention of the parties. This constitutes derivative acquisition via so-called cessio legis.

As a result, the economic copyright is transferred upon acceptance of the work. It should also be noted that there is a separate provision in Article 74(3) of the Copyright Act, apart from Article 12(1), which provides that the economic rights to a computer program created by an employee as part of their employment duties belong to the employer, unless the agreement states otherwise. Based on this provision, the employer acquires the full economic rights to the program at the time of its creation. This is a primary acquisition of copyright by the employer — meaning the programmer does not benefit from, nor dispose of, copyright, and therefore is not entitled to receive copyright royalties, which excludes the application of the 50% tax-deductible costs to the programmer’s remuneration.

However, under the aforementioned provision, the transfer of copyright between a programmer and their employer may be regulated differently in the employment contract. The Copyright Act allows the employer and employee to agree in the employment contract that the economic rights to a computer program created (or co-created) by the employee as part of their employment duties shall belong to the employee rather than the employer (Article 74(3)). In such a case, the general rule of derivative acquisition of economic rights by the employer in exchange for appropriate remuneration is reinstated, overriding the exceptional statutory provision granting the employer the primary acquisition of all economic rights to the program.

Therefore, in order to benefit from the 50% tax-deductible costs, it is necessary to modify the rules for the acquisition of copyright by the employer in the employment contract. To ensure the changes have been correctly implemented, it is advisable to seek professional legal assistance.