This includes not only increasing expenditure on the modernisation of armed forces, but also developing the defence industry, energy security, critical infrastructure, strategically important technologies, and even data centres.
Businesses are playing an increasingly important role in this process, participating in projects for the defence sector and providing manufacturing, technological, logistical, and engineering solutions. Many of these companies may benefit from tax incentives supporting research and development activities, the commercialisation of innovations, production automation, and expansion into new markets. Properly utilised tax reliefs for the defence industry can significantly reduce investment costs and increase the competitiveness of companies carrying out projects related to security and defence.
Tax Incentives and other support instruments
In order to accelerate the development of this sector and encourage businesses to undertake strategically important investments, countries are introducing a range of support instruments, including tax incentives, exemptions, and administrative simplifications. What tax reliefs are currently available to defence companies and businesses cooperating with the defence industry, and how can they be used effectively?
IP BOX for companies in the military sector
IP BOX is a tax incentive introduced in Poland in 2019 that allows businesses to apply a reduced 5% income tax rate to income derived from qualifying intellectual property (IP) rights. The IP BOX regime may be used by businesses that, as part of their operations, have created, developed, or improved qualifying intellectual property rights and subsequently generate income from them.
IP BOX applies, among other things, to the development of new technologies, cybersecurity solutions, software, technologies, and innovative components used in the defence industry.
Important: Businesses meeting the relevant conditions may benefit from the R&D tax relief and IP BOX simultaneously.
R&D tax relief for companies cooperating with the defence sector
The R&D tax relief is one of the most important tax incentives available to businesses investing in innovation. The relief may also be used by companies in the defence and armaments sectors that conduct research and development activities related to the development of new technologies, materials, systems, or software.
It allows businesses to make an additional deduction from their taxable base for qualifying costs incurred in connection with research and development activities. In many cases, a business may deduct as much as 200% of qualifying costs, first recognising them as tax-deductible costs and then making an additional deduction under the R&D tax relief.
Expansion tax relief
The expansion tax relief for the defence industry supports businesses developing product sales and entering new markets. For companies in the defence sector, it may provide significant support in obtaining new contracts and developing export activities. Defence companies may deduct costs related, among other things, to participation in trade fairs, promotional activities, adapting products to contractors’ requirements, and preparing documentation necessary for the sale of products, participation in tender procedures, or submitting offers to potential contractors.
Important: The use of this tax incentive is subject to certain conditions, including an increase in revenue from the sale of products within two years from the end of the tax year in which the expenses covered by the relief were incurred.
Robotics tax relief for the defence industry
The robotics tax relief supports businesses investing in the automation and modernisation of production processes. It was introduced in 2022 and, under the current regulations, applies to qualifying costs incurred in the years 2022–2026. It allows PIT and CIT taxpayers to make an additional deduction from their taxable base equal to 50% of qualifying costs incurred in connection with robotisation, subject to the applicable conditions.
The relief may cover expenditure on the purchase of industrial robots, associated equipment, software, systems integration, and training related to the implementation of new solutions.
Tax Relief for innovative employees in the defence industry
The tax relief for innovative employees allows businesses in the defence sector to settle the unused portion of the R&D tax relief where, in a given tax year, they were unable to fully deduct it due to a tax loss or insufficient taxable income.
This mechanism allows the undeducted amount of the R&D tax relief to be deducted from advance payments of personal income tax (PIT) withheld from the remuneration of employees involved in research and development activities.
KR Group as a partner for companies cooperating with the defence industry
Tax reliefs available to companies in the defence sector can provide tangible support for businesses investing in innovation, the development of new technologies, and increased production capacity. An appropriate combination of incentives, such as the R&D tax relief, IP BOX, robotics tax relief, and expansion tax relief, can significantly increase the tax efficiency of projects being implemented.
The growing importance of the defence sector means that businesses are increasingly looking not only for tax support, but also for a partner who can help them use available incentives safely and effectively while ensuring compliance with applicable regulations. For years, we have supported entities operating in Central and Eastern Europe, helping them make effective use of tax reliefs and implement projects in a demanding legal and tax environment.
– Paweł Cabaj, Head of Business Development at KR Group
Find out more: https://www.krgroup.eu/services/tax-advisory/tax-reliefs/
FAQ
Can a defence company benefit from the R&D tax relief and IP BOX simultaneously?
Yes. Businesses meeting the conditions specified in the applicable regulations may combine the R&D tax relief with the IP BOX regime. This allows them to first deduct research and development costs and then apply the 5% tax rate to income derived from qualifying intellectual property rights.
What tax reliefs are available to businesses in the defence sector?
Companies operating in the defence industry may benefit, among other things, from the R&D tax relief, IP BOX, robotics tax relief, expansion tax relief, and tax relief for innovative employees, provided that they meet the conditions specified in the tax regulations.
Can the purchase of industrial robots be deducted from tax?
Yes. Under the robotics tax relief, businesses may additionally deduct 50% of qualifying costs related to the purchase of industrial robots, associated equipment, software, and the implementation of new solutions.
Can companies cooperating with the military benefit from tax reliefs?
Yes. Tax incentives are not intended exclusively for arms manufacturers. They may also be used by businesses providing technologies, software, logistics solutions, components, or services to the defence sector, provided that they meet the conditions arising from the applicable regulations.
