The production of computer games is often associated with creative, technological and conceptual work. From a tax perspective, however, this does not automatically mean that such activity meets the criteria for research and development activity, or that the related expenses may be settled under the R&D tax relief.
Additional doubts may arise where work on computer games is not performed by persons engaged under employment contracts or mandate contracts, but by collaborators acting under contracts for specific work (Polish: umowy o dzieło), i.e. result-based civil law contracts under Polish law.
In one of the cases handled by us, we managed to obtain a positive individual tax ruling issued by the Director of the National Tax Information regarding precisely this model of cooperation.
Case background
The case concerned a Company operating in the computer game development industry. The scope of the Company’s activity covered both the production of games and subsequent work on their updates, development and significant improvements. A key element of the described model was the involvement of collaborators performing specific project work under contracts for specific work.
By applying for an individual tax ruling, the Company wanted to confirm primarily two issues, i.e.:
- First, whether its activity in the field of game production and game updates could be recognised as research and development activity within the meaning of the CIT Act;
- Second, whether remuneration paid to persons involved in such work, in particular under contracts for specific work, may constitute qualified costs settled under the R&D tax relief.
Position of the tax authority
Research and development activity
The Director of the National Tax Information agreed with the Company’s position and confirmed that the activity described by the Company in the field of game production, as well as further updates and development of games, may meet the definition of research and development activity.
The authority referred, among other things, to the creative and systematic nature of the work carried out, its focus on creating new or significantly improved solutions, as well as on using and developing knowledge in the areas of IT, technology and digital product design.
It was also important that activities of a routine, maintenance, implementation or purely simple bug-fixing nature were excluded from the scope of work classified as R&D work.
Contracts for specific work as qualified costs
The most interesting element of the discussed ruling from a practical perspective concerned remuneration paid to persons cooperating with the Company under contracts for specific work.
The Director of the National Tax Information confirmed that remuneration under such contracts may constitute qualified costs under the R&D tax relief, provided that it relates to research and development work and that the remaining conditions resulting from the CIT Act are met.
Importantly, in the Company’s analysed model, remuneration under contracts for specific work was assigned to the performance of a specific result, i.e. a specific result / deliverable, and not to working time. The collaborators performed only tasks related to R&D work, without carrying out any additional administrative or organisational activities. The Company therefore did not keep standard working time records for those persons.
As a result, the Director of the National Tax Information accepted the possibility of including the entire remuneration under contracts for specific work in R&D qualified costs in such a model, where the remuneration relates exclusively to R&D work and is properly documented on a project basis.
Not every form of cooperation is subject to the same rules
It should be emphasised, however, that the analysed ruling does not change the general rules for settling personnel costs under the R&D tax relief.
The situation should be assessed differently in the case of employment contracts and contracts of mandate, especially where a given person performs not only research and development tasks, but also other activities, e.g. administrative ones. In such cases, it remains necessary to properly separate the part of remuneration attributable to R&D activity, most often through working time records or another reliable method allowing the appropriate proportion to be determined.
This means that, for the purposes of the R&D tax relief, taxpayers should each time analyse not only the nature of the project being carried out, but also the manner in which the cooperation is structured, the scope of duties of specific persons and what the remuneration paid to them actually relates to. Documentation allowing the link between a given cost and R&D activity to be confirmed also remains important.
The described ruling may be a positive signal primarily for entities from the gaming and technology industries that conduct creative and development work with the involvement of collaborators acting under contracts for specific work.
In general, the ruling fits into the favourable approach of the tax authority, according to which the production of computer games and their significant updates may – provided that the work is of an appropriate nature – constitute R&D activity. However, the second element of the ruling seems more important in practice, i.e. the confirmation that remuneration under contracts for specific work may, under certain conditions, be settled under the R&D tax relief without standard working time records.
However, this ruling should not be treated as a universal confirmation of a solution that can be automatically applied to every cooperation model based on contracts for specific work. In our view, protective measures remain key, in particular properly describing and documenting the work, excluding from the R&D tax relief routine, administrative and other activities that do not have a research and development character, ensuring the possibility of clearly assigning remuneration to R&D activity, and maintaining consistency between contracts, project records and the actual course of the work performed.
From the perspective of taxpayers using the R&D tax relief, the ruling therefore constitutes a useful practical argument, but at the same time serves as a reminder that the defensibility of such treatment depends primarily on the actual nature of the work, the way in which the cooperation is structured and the quality of the documentation held.
Kamil Orłowski
Senior Consultant
