Classification of income generated by authors and art performers

Directors of Tax Chambers, while issuing, under the Tax Ordinance and on behalf of the Ministry of Finance, individual tax interpretation statements, have changed their position concerning the system of classification of creators’ and art performers’ incomes generated within the framework of their business activity under the copyrights and neighbouring rights held. Until 2013, it was deemed that non-agricultural business activity, which is named in article 10 section 1 of the Act on Personal Income Tax (hereinafter referred to as “the Act”) constitutes a source of such income. For the sake of illustration, the individual interpretation by the Director of the Tax Chamber in Bydgoszcz, dated 23 October 2012 (ITPB1/415-877/12/MR) may be referred to, which reads that “subject to the provisions of the Tax Law, it is necessary to accept that when a natural person running a business activity, within the scope as indicated in the motion, shall obtain performance-related royalties, the income thus generated shall be classified as a source referred to in article 10 section 1 of the Act, i.e. as an income from a non-agricultural business activity”.

In 2013, some individual tax interpretation statements were issued, according to which disposal of proprietary rights (article 10 section 1 point 7 of the Act) is a source of the same income (from disposal of proprietary copyrights). So was held for instance by the Director of the Tax Chamber in Poznań in the interpretation statement dated 2 December 2013 (ILPB1/415-996/13-4/AP), considering a motion for performance-related royalties interpretation. The tax authority referred to the definition of business activity or non-agricultural business activity contained in article 5a point 6 of the Act, which enumerates the following profit-making activities:

1. manufacturing, construction, trade, services;
2. prospecting for, identification and mining of fossil fuels from mineral deposits;
3. use of tangible and intangible property;
4. running a business, in one’s own name, irrespective of the outcome, in an organized and continuous manner, from which the generated incomes are not classified as other incomes from sources as itemized in article 10 section 1 points 1, 2, and 4-9.

The Authorities claimed that the above-quoted definition unambiguously holds that when the Act classifies a given income as sourced from other than non-agricultural business activity, such income is classified as an income from that source and not from a non-agricultural business activity, irrespective of whether the occurrence generating that income is or not related to the business activity run. Such exemption covers, among others, incomes generated from proprietary rights, as referred to in article 10 section 1 point 7, i.e. incomes from copyrights and neighbouring rights, rights to inventive designs, typography of integrated circuits, trademarks and design patents, including disposal of such rights for profit. The ruling in question is noteworthy for it supports a minority position. The District Court did not carry out extensive investigations in that respect, which implies a conclusion that the Court applied the literal understanding of the provision. The Court referred to my opinions conveyed in the article entitled “Making a Work Publicly Available on the Internet” published in the Commercial Law Review (Przeglad Prawa Handlowego) No. 3/2009.

As a result, the Director of the Tax Chamber in Poznań decided that incomes from performance-related royalties should be classified as income sources defined in article 10 section 1 point 7 of the Act, i.e. incomes from proprietary rights, and not as incomes from non-agricultural business activity. This interpretation is absolutely contrary to the interpretation of the Director of the Tax Chamber in Bydgoszcz concerning a similar status quo. Divergent are also individual tax interpretation statements by the Director of the Tax Chamber in Warsaw dated 10 October 2013 (IPPB1/415-718/13-4/EC) and the Director of the Tax Chamber in Katowice dated 7 May 2013 (IBPBI/1/415-175/13/BK) concerning, respectively, incomes from disposal of film scripts and computer software.

It may be assumed that the above mentioned interpretations prove that tax authorities do change their position with respect to tax liability on incomes from creators’ using copyrights and art performers’ using neighbouring rights obtained while pursuing their business activity. It is hard to predict whether administrative courts will share this new interpretation.

Assuming that the new construction of law is to be the binding one, incomes of a natural person running a business activity, and being a creator or art performer, are, due to the fact of benefiting from copyrights and neighbouring rights, subject to such tax liability as the case is with incomes from proprietary rights disposal.  That may mean a higher tax rate – 23% instead of 19%. The tax-deductible expense constitutes 50% of the generated income, with the reservation that in any fiscal year, the total tax-deductible expense, as referred to in article 22 section 9 points 1-3 of the Act, may not exceed half the amount constituting the top threshold of the first tax tier, as referred to in article 27 section 1 of the Act, i.e. the amount of PLN 42,764.00 (article 22 section 9 point 3 and article 22 section 9a). If the taxpayer proves that their tax-deductible expenses were higher than those resultant from applying the above quoted percentage norm, the tax-deductible expenses assumed are in the amount actually incurred.

As a consequence, if the subject matter of an agreement with a creator running a business activity is for a work to be created and proprietary copyrights to be disposed of (a licence to be granted), it is requisite to have the consideration identified and the relevant VAT invoice issued by the creator (if they are a VAT payer) or a VAT-exempted invoice for work performance (within the business activity scope) and a separate VAT-exempted invoice for rights disposal (beyond the scope of the business activity).

Practitioners running a business activity who pay out a consideration in connection with rights acquisition – even from a creator (art performer) running a business activity – are obliged as taxpayers to withhold an advance income tax payment. Given the fact that the 50% tax-deductible expense rate is capped, the taxpayer should each time require that the creator (art performer) make a statement on the income generated, as referred to in article 22 section 9 points 1-3, i.e. from:

• payments for assignment of the proprietary rights to an invention,  typography of an integrated circuit, utility model, industrial design, trademark, or design patent;
• payments for a licence fee for assignment of the right to use an invention, typography of an integrated circuit, utility model, industrial design, trademark, or design patent earned in the first year of the licence lifetime from the first entity the licence agreement was concluded with;
• exercising the copyrights – in the case of creators, and neighbouring rights – in the case of art performers, in the understanding of separate provisions, or their disposal of such rights