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Alcohol production is a complex process, at the same time strongly regulated by the Polish legislator. In addition, the high competition on the market for the sale of alcohol products to some extent forces continuous work towards increasing product innovation.
Both the high level of competition and the over-regulation of the industry make alcohol production expensive and require continuous investment.
On the other hand, the disadvantages indicated above can be turned to the benefit of the industry by taking advantage of the regulations that apply in Polish tax law.
Until 2022, the Corporate Income Tax Act only provided for an allowance for research and development activities, which was, by the way, widely used in the alcohol industry. Since 1 January this year, several new tax reliefs have been introduced, which can be applied at any stage of alcohol production/sales.
Research and development relief
The most popular tax credit, introduced in 2016 to support entrepreneurs to encourage research into innovative solutions, technologies, not only on a global or national scale, but also on a company's level.
From 2022, the eligibility for this relief has been significantly extended, allowing for a substantial increase in savings through an increase of up to 200% of the deductible costs eligible for the relief, including costs incurred for, among other things, the procurement of materials, the deduction of depreciation measures, as well as costs incurred for the salaries of employees performing research and development activities.
As mentioned at the beginning, there is a lot of competition in the alcohol industry, which requires continuous product improvements or the introduction of new products, such as new flavours. This also means changing the recipe or production technology. Thus, it is, as it were, in the DNA of the industry to have research and development activities, which, in principle, can benefit from tax preferences. As mentioned, the industry has eagerly used the R&D deduction, although still not all taxpayers have become beneficiaries of the relief provisions. The subject of the relief may be activities involving, for example, the development of new product flavours or the reformulation of existing products.
Relief for prototypes (trial production)
Entrepreneurs carrying out research and development activities can claim a deduction for the trial production of a new product. The so-called Prototype Relief allows a deduction of 30 per cent of the costs incurred for the trial production of a new product or the costs of launching a new product and can be used, in relation to costs incurred from 2022 onwards.
The business of alcohol production to some extent necessitates the frequent introduction of trial production of new batches of products. These are often of considerable cost. At this stage of a product's life, trial production relief (often referred to as prototype relief) can be used. This relief provides a great opportunity for businesses to grow without having to bear the full costs allocated to trial production and at the same time encourages work of an innovative nature. The relief also allows for the deduction of costs incurred in bringing a new product to market. These costs include the necessary costs of research, expert opinions, preparation of the necessary technical documentation, approvals, CE marking, as well as the costs of the so-called LCA life cycle assessment (a method enabling determination of the environmental impact of products and organisations) and ETV environmental technology verification (supporting the commercialisation and dissemination of innovative environmental technologies). As it was emphasised, the aforementioned costs relate to necessary activities for launching a new product into the market and additional certificates increasing the prestige of a given product are no longer included in the eligible costs under this relief, however, through the deduction of these necessary, among others, tests, they may make it possible for entrepreneurs, whose costs of launching a new product into the market were not included in the budget, to incur the costs of additional certificates.
The relief for prototypes allows a wide range of deductions related to the manufacture of prototypes as well as incurring costs associated with their eventual commercialisation in the market. This relief is intended not only to support innovativeness on a company scale, but also to ultimately translate into the development of Polish products and their potential expansion on foreign markets (expansion relief), including again, as in the case of the robotisation relief, becoming part of the pro-environmental trend thanks to the possibility of deducting the costs of product life cycle testing and ETV environmental technology verification.
Relief for robotisation
The robotisation allowance can already be applied to costs incurred from 2022. It allows entrepreneurs to make an additional deduction of 50% of the costs incurred for investment in robotisation - firstly the expenses incurred for tax costs and then deduct 50% of the above expenses from the tax base. For the heavily innovative alcohol production industry, this is a huge opportunity to deduct additional costs under the new tax relief. The subject of the relief may be, for example, production lines or their components meeting the criteria indicated in the CIT Act. Machines used for packaging or e.g. labelling are also potentially eligible for the robotisation relief.
Relief for expansion
The main purpose of the relief is to be able to additionally deduct the value of expenses that are related to the increase of income from the sale of products. Products are things made by the taxpayer - that is, according to the definition of the Civil Code, tangible and capable of being traded independently.
The product can be an item already manufactured by the taxpayer, as well as items not previously offered by the taxpayer, as not yet offered in the given country. In the case of new products, expansion relief can be in addition to R&D and prototype relief - once a new product has been launched, expenditure on generating revenue from its sale can be counted towards the new relief.
Although the Ministry of Finance initially spoke of expansion into foreign markets, the bill allows for the deduction of expenses incurred to increase sales in the domestic market as well.
Expenditure on expansion will be deductible twice - as a KUP and as a relief, with the deduction being limited to PLN 1 million in a tax year. The condition for taking advantage of the relief is:
increased revenue from product sales,
sales of new products, as well as
an increase in revenue from the sale of products not previously offered to a given sales market (domestic and foreign).
Costs incurred to increase revenue from the sale of products, which will be able to build up the value of the write-down/allowance, are considered to be costs:
participation in trade fairs, incurred for the organisation of the exhibition venue and the purchase of air tickets, accommodation and meals for employees and the taxpayer;
promotional and information activities, including the purchase of advertising space, the preparation of a website, press publications, brochures, catalogues or leaflets relating to products;
adaptation of packaging to the contractor's requirements;
preparation of documentation for the sale of products, in particular certification of goods and registration of trademarks;
preparation of the documentation necessary to enter into tenders, including submission of bids to other parties.
The new relief will cover all businesses, including SMEs that are taking on the challenge of expansion.
Given the restrictive regulations on the advertising of alcoholic products, the provision on the cost of adapting packaging to the contractor's requirements - for example, a packaging or bottle label production line - seems particularly interesting.
It should not be forgotten that reliefs may be combined - for example, the cost of purchasing a packaging machine may be subject to robotisation relief, expansion relief and, in specific circumstances, trial production relief.
Summary
The application of the R&D allowance and the new reliefs from 2022 onwards provides ample opportunities for entrepreneurs to further develop themselves by being able to deduct costs incurred for innovation activities and those related to the development of their products.
Although many operators in the alcohol industry have already benefited from R&D relief in previous years, there are still very significant opportunities (and, as of this year, much greater than in previous years) to deduct income tax.
Innovation is an immanent part of the alcohol industry, and this offers great tax advantages that can be exploited.
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