On 1 January 2018, provisions of the Personal Income Tax Act were amended in respect of, among other things, the settlement of revenue generating costs by so-called “authors” (Art. 22 Sec. 9 Sec. 9a, and the new Sec. 9b of the Act).
It should be remembered that the provisions of Art. 22 Sec. 9 of the Act in the 2013 version made it possible for a number of categories of persons pursuing creative professions to apply lump-sum revenue generating costs at the level of 50%. In practice, the most commonly applied category was the one described in item 3 which described the manner of exercise of copyrights by authors, and related rights by artist-performers, or those benefitting from these rights by such persons. The total annual revenue generating costs calculated by authors at the lump sum level of 50% could not, however, exceed half the amount constituting the upper limit of the first tax band, as referred to in Art. 27 Sec. 1 of the Act.
In practice, the aforementioned regulation of Art. 22 Sec. 9 of the Act made it possible to apply the preferential 50% of the revenue generating costs by a comparatively large, but not strictly defined, group of natural persons, exercising the copyrights/related rights in connection with various forms of creative activities performed under a wide range of contracts; both civil-law contracts, and employment agreements.
New provisions and new doubts
The amendment of the aforementioned provisions which changes the manner of taxation of the income generated by authors as of 1 January 2018, manifests itself in two aspects. The first is quite positive because the annual limit of 50% of the revenue generating costs has been doubled: in 2018 the limit in question amounted to PLN 85,528. Consequently, the income left for authors (after the taxation of the revenue) will also increase. The second aspect is more controversial, and concerns the introduction, to the new Sec., of an exhaustive list of the types of creative activities which would entitle authors to apply the preferential principles of tax allocation.
Without doubt, this legislative move considerably narrows the group of taxpayers who could benefit from the preferential regulations discussed here. This new limitation is a manifestation of the doubts concerning the availability and conditions of lump-sum-based cost settlements (especially by employees) which have recently been manifesting more and more frequently in negative interpretations from the tax authorities. The tax authorities, in their interpretations, would repeatedly refer to the elements that would condition the application of the beneficial taxation, such as: the relevant provisions of employment contracts and the principles of rendering work, the relevant determination (within a given contract) of the obligations of an employee - author, the relevant manner of the description of the hours of work, the adequate determination of the principle of calculation and the allocation of the remuneration due to the employee, and, the taking into account of the relevant copyright regulations in the relations with a given employee.
The continuing discussions concerning the new Sec. 9b are also exemplified by the fact that no sooner was the regulation introduced than it was necessary to reword the regulation so it could organise and widen the catalogue of “eligible" creative activities. Consequently, an amendment was recently prepared which will take into account certain creative sectors; such as construction engineering, translations, or computer game design, as well as scientific / academic activity, and didactic activities carried out at higher education institutions. The amended provisions, to be introduced during the course of this year, are to apply retroactively as of 1 January.
However, although the catalogue of activities regarded as “creative” after the introduction of these changes will be quite wide, it will not exhaust all of the types of these activities which one can come across in business practice. It is therefore possible that in certain cases those authors pursuing less typical professions, or those “forgotten" by the legislator, will not be able to exercise the preferential form of taxation. In other cases, doubts as to their eligibility might also arise. It should be borne in mind that the market, as well as in its creative sphere, is constantly changing; these changes are best seen in various artists presenting atypical skills during so-called “talent shows.”
In the context of the above, we should remember the recurring problem relating to definitions which is a somewhat common issue in the interpretation of tax law. The principle is that, if a given notion does not have a clear definition for the purpose of tax regulations, this notion should be understood in accordance with its linguistic interpretation. This means that there will be doubts as to the understanding of individual types of creative activity, especially in those cases where a definition contained, for example, in sector regulations, considerably differs from the linguistic (dictionary) definition. Consequently, in light of the introduction of the new Sec. 9b, this issue will translate into disputes with the tax authorities.
Alternative allocation of increased costs using the “old method”
While discussing the provision in question, we should not forget about another possibility. By virtue of Art. 22 Sec. 10, and Sec. 10a of the Act, an author also continues to be entitled to settle the actually incurred costs in those situations where they are higher than those determined by the aforementioned 50% norm. The spectre of these costs is wide and also comprises any relevant costs incurred in previous years which makes it possible for a number of authors to get their income "right.” It should be underlined, however, that the application of this norm requires utmost care during the documentation and allocation of the relevant costs.
