Transforming a sole proprietorship into a limited liability company does not exclude the possibility of applying a 5% CIT rate under the IP Box relief – provided that the conditions specified in the CIT Act are met. Therefore, the fears of losing preferences among taxpayers whose dynamic business development directs them towards changing their organizational and legal form may prove unfounded. Using the example of binding tax ruling of October 1, 2024, reference number 0114-KDIP2-1.4010.380.2024.7.AZ, let us consider the conditions for maintaining the continuity of the right to apply preferences.
Game Development as an R&D Activity
The applicant for the aforementioned tax ruling was an entrepreneur specializing in creating computer games. His activity covered the full development cycle: gameplay design, mechanics, generation and simulation of the game world, development of network modes, testing, integration of audiovisual components and implementation of programming solutions. The nature of his work was clearly classified as research and development (R&D) activity, because it involves the production and development of new, unique digital products using creative, experimental methods.
In connection with the planned transformation of a sole proprietorship into a capital company, the entrepreneur filed a request for an interpretation – asking whether IP rights generated before the transformation still qualify for the application of tax preferences in the new legal form.
Tax succession and IP Box relief after transformation
The tax authority recalled that, in accordance with Article 93a § 4 of the Tax Ordinance, a single-member capital company established by transformation of a natural person shall succeed to all tax rights of the transformed entrepreneur, unless other provisions exclude this. Moreover, Article 24d of the CIT Act indicates that qualified income from qualified intellectual property rights (including copyrights to computer programs) may be taxed at a preferential rate of 5% if these rights were created as part of the taxpayer’s R&D activity.
Tax authority found that since the company will continue its operations in the same scope and will be the owner or co-owner of the qualified IP, it has the full right to apply the relief – also to the rights generated within the framework of sole proprietorship, if the conditions provided for in Article 24d section 4 of the CIT Act, concerning the so-called nexus indicator, are met.
How the nexus indicator and IP Box relief work
IP Box relief requires the separation of revenues and costs related to a specific intellectual property right. The income subject to preference is determined as the product of IP income and the nexus indicator, calculated in accordance with the proportion of costs incurred directly by the taxpayer or acquired from unrelated entities to the total costs incurred in connection with IP.
The tax authority stressed that it is possible to take into account costs incurred before the transformation, provided that they have not been previously deducted under PIT. However, the income must be achieved in the tax year already assigned to the limited liability company. In relation to the costs incurred for the creation/development of qualified intellectual property rights, the company will be able to deduct both the costs that it will incur itself (after the transformation) and the costs incurred as part of a sole proprietorship, but only to the extent that these costs have not been previously deducted under the IP Box relief by the entrepreneur who is a taxpayer of personal income tax.
The company must also maintain appropriate accounting records in accordance with Article 24e of the CIT Act – enabling the identification of revenues, costs and income attributable to each qualified IP.
Summary
The essence of transforming a sole proprietorship into a capital company is to change the legal form in which the entity operates. The transformed entity is not treated as a liquidated entity, because the business it conducts, using the same assets, will be continued in a different legal form. Therefore, while maintaining the continuity of the business activity and meeting the conditions for applying tax preferences, it is possible to continue using its benefits.