Several scenarios can arise when it comes to taxing licence or franchise fees.
35% tax
Royalties are taxed at 35% when a company pays them to a foreign company based in a country that has no double taxation treaty with the payer’s country (e.g. Hong Kong or an offshore jurisdiction). The royalty is still a deductible expense, but the company must withhold up to 35% tax on it – far more than the standard corporate income tax rate.
10% tax
Royalties are taxed at 10% when a company pays them to a foreign company based in a country that does have a double taxation treaty (e.g. EU member states or the USA). The royalty is a deductible expense, and the withholding tax is usually 10% – less than the standard corporate income tax rate.
10% tax
Royalties are taxed at 0% when a company pays them to a foreign company that holds at least a 10% stake in it (i.e. a parent–subsidiary relationship) and is based in an EU member state. The royalty is then a deductible expense and no withholding tax applies. Between related companies in different countries, however, the issue of transfer pricing arises, which limits the amount that can be deducted. A widely known benchmark for setting royalties between related companies is the classic 25% Rule in valuing IP, under which the royalty should equal 25% of the company’s gross profit. This is only a rule of thumb, though: several US court rulings have rejected it, and many commentators dismiss it, because every trademark or patent is unique and its value cannot be generalised. If related companies do not want to rely on this rule, they should set the royalty at the market rate that unrelated parties would agree. That requires valuing the trademark, which can be done in various ways – for example based on future income, on the costs incurred, or by comparison with other trademarks.
Royalties are also taxed at 0% when a company pays them to another domestic company. The royalty is then a deductible expense and no withholding tax applies.
Frequently Asked Questions About Trademarks
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Trademarks – FAQ
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The Trademark Registration Process
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Made an Invention? Patent It!
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Filing a Patent Application for an Invention
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How to Obtain a Patent and the Conditions for Grant
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What Is a Trademark?
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Trademark Wording
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Word and Figurative Trademarks
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How Long a Trademark Lasts
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Trademark Classes
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US Trademark
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EU Trademark
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Slovak Trademark
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International Trademark
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Countries of the Nice Agreement
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Intellectual Property
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Trade Secrets as an Alternative to a Patent
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