Cooperating with the defense industry plays a significant role in the economies of many countries, presenting a range of challenges but also unique benefits for businesses. Government support in the form of tax reliefs is a critical component of growth strategies for companies operating in this sector. What support mechanisms are available for companies in the defense industry, and how can they be effectively utilized?
R&D tax relief
The R&D tax relief is one of the key tools for supporting technological innovation in the defense industry. This relief allows companies to deduct from their taxable base the costs associated with R&D activities, which effectively enables a reduction in income tax by 19% of the so-called qualifying costs.
Important: With this relief, companies can account for 200% of incurred costs in their income tax as follows:
- 100% as a deductible business expense
- 100% as a deduction under the R&D relief.
Example of applying R&D relief in the defense sector
In the defense sector, where advanced technologies and innovative solutions are crucial, the R&D relief can be especially beneficial. For instance, a defense company investing in the development of modern defense systems can deduct costs related to personnel involved in R&D, expenditures on research into new materials (including material consumption), prototype testing, and collaborations with research institutes. This allows the company to reduce its R&D operational costs, fostering the creation of innovative products and technologies.
IP Box
The IP Box provides preferential tax treatment for income from qualifying intellectual property (IP) rights that have been created, developed, or improved through R&D activities. This allows for the taxation of IP income at a rate of 5% rather than standard tax rates.
Qualified income eligible for the 5% preferential rate includes income from patents, utility model rights, industrial design registration rights, and copyrights for software.
An entrepreneur who commercializes the results of R&D activities can benefit from both the IP Box and R&D relief! The more R&D activities a company conducts independently within Poland, the larger the portion of its income that may be taxed at the preferential rate. This provides genuine tax benefits for “Polish” defense companies.
Important
Robotics relief
Defense companies that invest in robotics can significantly enhance the efficiency of their production processes. Industrial robots can perform repetitive and precise tasks faster and more accurately than humans, resulting in higher product quality and shorter order fulfillment times.
The robotics relief allows companies to reduce production costs by decreasing labor expenditures and minimizing production errors. An additional 50% deduction of robotics-related costs from the taxable base helps optimize the budget and reinvest savings into technological development.
Prototype relief
The prototype relief enables an additional deduction of 30% of the income-related costs associated with trial production and launching a new product to the market. This relief helps reduce the cost of prototype creation, supporting companies in the testing phase before mass production and market introduction.
Innovative employee relief
The innovative employee relief is dedicated to employers who, in their annual return, did not deduct R&D relief from their income due to a loss in the tax year or where the eligible deduction exceeded the generated income. In practice, this relief allows for the deduction of the unused R&D relief portion from the income tax advances of employees engaged in R&D activities.
Transfer Pricing
It’s also essential to remember that transfer pricing regulations apply to companies cooperating with the defense industry. This includes transactions such as the purchase of equipment by a Polish entity from affiliated entities for resale in the Polish market and, if applicable, debt financing.
For companies with a fiscal year aligned with the calendar year and transactions exceeding reporting thresholds, the deadline for preparing transfer pricing documentation is October 30, 2024, with a submission deadline to the Tax Office (TPR) on December 2, 2024, since the original deadline falls on a Saturday.
