Expansion will bring tax relief only for manufacturers

The tax confusion created by the Polish Deal was a huge burden on corporate HR departments. Accounting – if functioning separately – at the turn of the year measured itself against Estonian CIT, hidden dividends, minimum tax or withholding tax. As a result, there is relatively little interest in new tax breaks, although several were introduced as part of the reform. One of them is the expansion tax credit, which applies to typical enough expenses that any manufacturing company should be interested in it.

Why should expansion relief catch the attention of manufacturing entities in particular? Because it is reserved only for manufacturing entities in the strict sense of the word.

The relief covers expenditures relating to the increase of revenue from the sale of products. In turn, as indicated by Article 18eb section 2 of the CIT Law (respectively – Article 26gb section 2 of the PIT Law), products are understood as things produced by the taxpayer. As a result, the relief will not be applied by either service entities (selling service “products”, for example financial) or commercial entities (admittedly selling things, but produced by someone else).

Moreover, the relief applies to expenses incurred in connection with sales to unrelated parties. While it is clear from the very essence of the relief that it should apply to expenses that are intended to increase sales in the market, some of them may be of a different nature. For example, certification of goods may also be required by a related party – expenses related to this may not be eligible for relief.

What is the relief based on?

The new expansion relief is similar in nature to the – already well-known – research and development (R&D) relief: the taxpayer first credits a given expense under the “standard” rules, and then can deduct it again in his tax return. If, for example, a large CIT taxpayer has incurred qualified expenses of PLN 100,000 net, he can recover a total of as much as PLN 38,000 in tax (PLN 19,000 in tax expenses and an additional PLN 19,000 in relief).

The relief is settled in the annual return – meaning it should not be used for the purpose of calculating advance tax payments. In the updated CIT-8 return (and returns for PIT purposes) for 2022, there will probably be a special field in which to enter the amount of the relief. Importantly, the relief can only be deducted from operating (not capital) income.

The amount of the relief is limited, but the statutory limit seems quite high – it is PLN 1 million, which in a large CIT taxpayer means a maximum savings of PLN 190,000 per year.

No increases – no reliefs

The biggest drawback of the relief is that it is granted conditionally and operates on the basis of risk, which is borne by the taxpayer. The relief is granted on the condition that the revenue from the sale of products is increased in relation to the revenue from such products determined as of the last day of the tax year preceding the year in which the costs were incurred (qualified for the relief), or that revenue is generated from the sale of products not previously offered (or, alternatively, that revenue is generated from the sale of products not previously offered in a given country).

The expansion tax credit is an instrument as interesting as it is complicated and risky. Failure to meet the sales condition does not result in a risk of interest, but taxpayer must face the risk of having to pay back the tax if sales forecasts are not met. In addition to this, the application of the relief will require some documentation effort.

As a result, relief is granted if one of the following conditions is met:

1) an overall increase in sales of the product for which the company is requesting relief;

2) achievement of (any) revenues from sales of a product not previously offered;

3) achievement of (any) revenues from the sale of a product not previously offered in a given country.

Thus, globally, a taxpayer may have fewer sales of a product than in the base year, and yet be entitled to relief if it succeeds in selling products in a new market (known as a new country).

These conditions must be met in 2 consecutive tax years after the year in which the expansion expenses were incurred. It is not entirely clear how to compare base year revenues with the following 2-year period. The rational approach seems to be that if, for example, in 2021 the total revenue from sales of a product was exactly PLN 10 million, then the total sales of the product in 2022-2023 should exceed PLN 20 million. This is because it would be difficult to speak of an “increase” in sales if the two-year period were to be comparable to a single fiscal year. The question also arises, is the increase in sales to occur in each year of the 2-year period? Bearing in mind that section 6 of the regulation refers to a “time period to generate revenue”, it would seem that there is no need to do so. Unfortunately, the Ministry of Finance’s explanations in this regard are not clear, and a taxpayer wishing to take advantage of the relief should consider securing itself with an individual interpretation.

What if the taxpayer has deducted the relief, but failed to meet the above conditions? True, he loses the right to the deduction, but fortunately not retrospectively. In such a case, he will be forced to add the previously deducted amount of the relief to his income – in the second year of the 2-year period, which will be examined for the purpose of fulfilling the statutory conditions for applying the relief. As a result, by taking advantage of the relief, the taxpayer does not risk penal interest, let alone fiscal criminal liability (as long as taxpayer meets the other conditions for the relief).

Expenses covered by the relief

The interesting part of the relief is the expenses that apply to it.

First and foremost, these must be expenses incurred to increase product sales. Meeting this criterion does not seem particularly difficult, given the characteristics of the expenses covered by the relief.

The statutory catalog includes the following types of costs:

1) concerning participation in trade fairs incurred for:

(a) organization of the exhibition venue,

(b) purchase of air tickets for employees,

It is important to note that expenses related to transportation and accommodation can only apply to employees, which means that they do not include costs related to the participation of contractors invited to industry events.

Costs of participation do not concern any trade fairs, but only in such events where the taxpayer presents its products. Thus, the right to the relief is not given, for example, by expenses for the participation of employees in fairs where representatives of the taxpayer are looking for subcontractors, suppliers of semi-finished products, etc. From this perspective, documentation is important – the entity benefiting from the expansion relief should be able to prove the purpose of participation in the relevant fairs.

2) Costs of promotional and informational activities, including the purchase of advertising space, preparation of a website, press publications, brochures, informational catalogs and flyers, concerning products.

This category also does not seem particularly controversial. It includes all kinds of advertising activities – provided that they relate to the product to which the relief is to be applied. There are already interpretations confirming that expenditures on Internet campaigns also allow for the use of the relief (see the interpretation from July 6, 2022, no. 0111-KDIB1-1.4010.188.2022.2.BS). However, if the advertising covers the activities of the entire company and also involves products whose manufacturer is not the taxpayer, it may not be possible to take advantage of the relief.

Other types of expenses provided for in the law are as follows:

3) costs of adapting product packaging to the requirements of contractors;

4) costs of preparing documentation to enable the sale of products, in particular regarding certification of goods and registration of trademarks;

5) costs of preparing the documentation necessary to enter a tender, as well as for the purpose of submitting bids to other entities.

Complicated relief, difficult closing of 2022.

When you take a closer look at expansion tax relief, it turns out to be an instrument as interesting as it is complicated and risky. Admittedly, as mentioned, failure to meet the sales condition does not result in a risk of penalty interest, but taxpayer has to reckon with the risk of having to pay back the tax if sales forecasts are not realized. Moreover, the application of the relief will require some documentation effort.

The expansion tax credit is just one of numerous new elements of the income tax laws that will appear for the first time in the settlement for 2022. Correct calculation of tax for 2022 may therefore require considerably more effort than in previous years.

Author: Bartosz Mazur, Tax Advisor