Significant aspects of tax settlements in the construction industry
The business of entrepreneurs in the construction industry may involve a number of different activities, from the manufacture of construction materials to the implementation of construction investments and their commercialisation.
Construction industry and CIT or PIT tax credits
Entrepreneurs in the construction industry who are involved in manufacturing activities may benefit from several tax credits provided for in income tax acts.
First and foremost, entities in the construction industry may be beneficiaries of the research and development tax credit (hereinafter: R&D tax credit), e.g. in the case of developing new, improved, modified products. The R&D tax credit entitles its beneficiary to up to a threefold deduction of costs related to R&D activities from the income tax base. In accordance with the statutory definition, R&D activities include, for instance, undertaking activities aimed at developing new products, processes or services or improving existing and previously manufactured products. Activities meeting this definition often occur in the manufacture of building materials.
Successful completion of the work is not necessary for the R&D tax credit to be applied, and the novelty of the product/service can occur on a company-wide basis. The maximum amount of additional deduction from the tax base, i.e. in addition to the standard deduction, of eligible costs under the R&D tax credit, is 100% or 200% (in the case of employee costs or holding the status of a research and development centre). The advantage of the R&D tax credit is its accessibility, as its applicability is not determined by the size of the company.
In issued tax rulings, tax authorities confirm the applicability of the R&D tax credit in activities involving the manufacture of, among other things, construction robots, elements for construction machinery, construction chemicals, elements for building structures, products made of concrete, gypsum or cement.
The implementation of the R&D tax credit should be preceded by an analysis of the eligibility of the business conducted and verification of eligible costs that can be deducted. As an example, such expenses include expenditure on employee remuneration together with social security contributions, depreciation write-offs on tangible and intangible assets, costs of obtaining a patent, purchase of expert opinions, opinions and advisory services from specific entities and, above all, purchase of materials and raw materials directly related to the conducted R&D business.
If it is not possible to settle the full amount of the R&D tax credit in a given year, this can be done in 6 consecutive tax years or the Innovative Employee Tax Credit can be applied. The Innovative Employee Tax Credit provides for the possibility for CIT or PIT taxpayers with an unsettled R&D tax credit in the previous year to deduct the R&D tax credit from advances on personal income tax levied on income (revenue) of natural persons, from: service relationship, employment relationship, contract work, cooperative employment relationship, performance of services under a contract of mandate or contract for specific work, copyrights. The deduction will be conditional upon the employee spends at least 50% of their total working time directly to R&D activities in a given month.
Entities in the construction business which carry out manufacturing activities and use robots in doing so may also consider applying the robotisation tax credit. The robotisation tax credit allows 50% of the eligible costs incurred for robotisation to be deducted from the tax base.
Companies in the construction industry, as part of their day-to-day operations, often also incur expenses related to promotion, marketing or participation in trade or other fairs to support the launch of a new product. All of these expenses can be deducted under the expansion tax credit up to an amount of PLN 1,000,000 per year.
Contrary to general belief, some entrepreneurs in the construction industry can apply a number of tax credits provided for in the CIT and PIT Act. When planning one’s tax settlements, it is worth considering their application in order to reduce the tax base in CIT or PIT.
Settlement of construction services under income taxes
Revenue from the provision of construction services generally arises on the date of the delivery and acceptance report or other document of a similar nature.
In the case of long-term contracts, costs directly related to the project may be settled in proportion to the revenue generated, taking into account the degree of progress of the work. As the first step, the ratio of invoiced revenues to all revenues from the execution of the contract should be established. This ratio limits the maximum amount of tax costs that can be settled in a given tax year in relation to all planned costs related to the implementation of the project. If the costs actually incurred in a given year are higher than the cost limit determined on the basis of the progress of the work, the excess of these costs may be settled by the taxpayer in the following tax year. This rule stems partly from the provisions of the CIT Act and from the practice formed on the basis of advance tax rulings issued by the tax authorities.
In the case of provision of construction services outside Poland, it is also important to determine whether a foreign permanent establishment has been established, resulting in taxation of income in the country of the permanent establishment. The prerequisite for the creation of a permanent establishment is the conduct of construction work in the territory of another country for a specific period of time indicated in the double taxation treaty [DTT]. This period most frequently covers 12 months, though may vary depending on the country the DTT has been concluded with, thus, it is worth verifying the tax consequences at the stage of planning the works. It is worth ascertaining the tax burden in the country the permanent establishment is located in and taking it into account when calculating the fee for the services.
Katarzyna Kozakowska, tax advisor and senior manager, Real Estate Practice, MDDP
Dariusz Fistek, tax advisor and manager, Real Estate Practice, MDDP
Last Updated on May 30, 2023 by Janusz Gil