A widely applied business model among software development companies is providing software development services for other businesses. Few of these companies know that they can still claim tax relief in this case too, just as they would be able to if they were developing software for their own purposes.
The tax relief on royalties has been available for almost twenty years and allows businesses that develop intellectual property, including patents, utility models and software, to benefit from corporate tax relief on the licensing or transfer of their intellectual property. The relief is 50% of the profit on the amount paid for the work done (the “consideration”), which allows the effective corporate tax burden to be reduced to 4.5%.
In addition to the corporate tax relief, the consideration that is classed as a royalty is not subject to local business tax, either.
Royalties tax relief for all
Obviously, companies that sell software products developed by themselves can take advantage of the above forms of relief. Other businesses, however, prefer to carry out developments on a project basis, based on concrete specifications provided by the customer – often by simply providing programming and other staff capacities under a time and materials (T&M) contract. In the case of the latter models, many believe that they cannot claim relief, saying that “the intellectual product is not created by them but by their customer”. This assumption is, however, mistaken. Regardless of whose idea the development is based on, the intellectual property is always, in legal terms, created by the company that carries out the actual development. This is the case even if the parties have stipulated in the contract that all rights arising from the development will be “directly” held by the customer. Even in such case, the resulting copyright must be transferred, and part of the consideration received is necessarily classified as a royalty, subject to tax relief, at the company that carried out the development.
Thoroughness is key
It is important to emphasise that although the relief is available to essentially all software development companies, more is needed if they are to actually benefit from it. Thus, firstly, a contract that is written in sufficient detail and which contains the key phrases required by the tax authority (NAV). Secondly, documentation and calculations from which the consideration eligible for the relief can be derived. In addition, the companies also need to be aware of the practices applied by the tax authority. Under these practices, only a part of the consideration received for this type of activity – 80%, if the conditions are met – is classified as a royalty, with the remaining 20% taxed as “normal” remuneration for the work done.
Royalty and R&D tax relief together?
The icing on the cake is that the tax relief on royalties may be applied for together with R&D tax relief. Therefore, if the software development is also classified as R&D, then the R&D costs can be counted twice (and in some cases three times) for the purpose of reducing the corporate tax base. Moreover, if the development is classified as R&D, additional local business tax relief may also be available and, in certain cases, it may even be possible to reduce the amount of social security contributions paid on the employees concerned.