The Supreme Administrative Court, in its judgment of 22 February 2022, dismissed the cassation appeal of the Director of the National Revenue Administration regarding the application of a flat-rate 50% of the costs of obtaining revenue to the remuneration of computer game developers who are employees of the Applicant.

What was the case about?

A company producing and publishing computer games has requested a tax ruling on whether, as a payer, it may apply 50% of the costs of obtaining income when calculating employee income tax advances when:

1. an employee who is the creator in the month for which the royalty is due will transfer the rights to the work or works to the company?
2. an employee who is a creator will not transfer the rights to any work because the work on this work has not been completed and the work will be transferred after its completion?
3. the employee who is the creator did not perform creative work because he was on holiday or sick leave or was taking part in training?
4. an employee performing other activities (management, marketing) in addition to creative work will find himself in the situation described in points 1-3, in the case of separating the fee for creative work and remuneration for other activities?

The tax office's position

The Director of Tax Information ruled that the company was not entitled to apply the 50% tax-deductible costs in the above-mentioned situations. In his justification, he indicated that the increased costs may be applied when:

1. the work performed by the employee is subject to copyright, and therefore meets the requirements of a work specified in the Copyright and Related Rights Act,
2. the employee is an author within the meaning of this Act and the employee's income results from the author's use of these rights or disposal of these rights,
3. the employment contract provides for a differentiation of the remuneration due to the employee into an amount related to the use of copyrights (royalty) and an amount related to the performance of typical employee duties, and appropriate documentation is kept in this respect, e.g. a detailed record of transferred copyrights,
4. the income earned by the employee is obtained as a result of the activities specified in Article 22, paragraph 9b of the Personal Income Tax Act [including, among others, from audio and audiovisual works, computer programs, computer games].

The amount of the royalty cannot be determined by the employee's time required to create the work. Working time is not an indicator of its value. What matters is that the work was actually created, which must be proven, and that the employer paid a specific amount for acquiring the work. The royalty is intended to be payment for the employer's use of the employee's copyright, not for the time spent creating the work.

The authority further stated that the determination/separation of a fee cannot be considered a situation in which the amount of remuneration due to the employee for the transfer of copyright is the same each month, regardless of how many and what works were transferred to the employer.

Furthermore, the application of 50% of the cost of obtaining income to employee remuneration for the use or disposal of copyright applies only to periods of employment during which creative work is actually performed. During vacation, sick leave, training, or absence from work for reasons attributable to the employer, when the employee is not working, they are not fulfilling the obligation to engage in individual creative activity that results in the creation of a work.

Court decision

Following a complaint filed against the aforementioned interpretation, the administrative court sided with the company and overturned the contested interpretation. The Supreme Administrative Court dismissed the complaint filed by the Director of the National Tax Information Service.

In the justification of their judgments, the courts emphasized that the only condition for applying the increased costs, as provided for in applicable law, is being an author within the meaning of copyright law and receiving remuneration in connection with the use of the rights to the work. It is unacceptable for tax authorities to create additional conditions that limit the application of this institution. What is crucial is the close and direct connection between remuneration and the result of work, which is entirely devoted to creative work. This also means that the income an employee receives as remuneration results from the disposal of copyright.

Unlike the tax authority, the court found that making the amount of the fee dependent on the time of creative work falls within the scope of the contractual freedom of the parties to the employment relationship and does not affect the possibility of applying the 50% tax deductible costs.

The ruling confirms equal treatment in taxation, regardless of whether the work was created within the framework of an employment relationship or not. Although the facts of the case involve computer game developers, the determination of tax-deductible costs applies to copyright in the work, regardless of the subject of the business.

If you have any questions about the proper determination of copyright income tax deductible costs, please contact us. Our law firm provides tax advisory services to both legal entities and individuals.

This article is for informational purposes only and does not constitute legal advice.

Legal status as of February 24, 2023

Rafał Knap

Legal Counsel
+48 22 856 36 60 | r.knap@kglegal.pl