License payments royalties. What is royalty in simple words

Burning with the desire to open their own business under the name of a famous brand, young entrepreneurs begin to learn the basics of franchising. And then they are faced with such concepts as royalties and lump sum.

While the lump sum fee is still more or less clear, the variety of ways to collect royalties often leads to confusion. So what are royalties? How does this payment differ from a lump sum payment? How do franchisors calculate the royalty amount? Why choose one or another calculation scheme?

What is royalty?

The Russian language borrowed the word royalty from English-speaking countries. In turn, the word royalty came to modern English from the Middle Ages. From medieval French, roialte can be translated as “royal, royal, state.” Then this word was used as a legal term. Today, the term “royalty” is used in franchising, copyright and a number of other industries.

In the most general sense, royalties are compensation for the right to use the subject of a license agreement

But what are royalties in a franchise? These are regular payments that the franchise buyer makes to the copyright holder for the use of the trademark, logo and other brand attributes that distinguish it from its competitors. For example, he pays the company a monthly royalty for using the corporate red color, the slogan “I’m lovin’ it” and other brand attributes.

Many people are puzzled by the question of how a royalty differs from a lump sum fee. It would seem that both the royalty and the lump sum payment - payments for a trademark and franchise technologies. In fact, franchisees pay a one-time lump-sum fee for the right to join a network with a well-known name.

But if the franchisee pays a lump sum fee for a trademark, then why pay royalties for the same thing again and again? The answer is simple: in the vast majority of cases, the money received from royalty payments is spent by the franchisor on brand development, its marketing promotion, and sometimes the development of new products. Depending on the magnitude of these costs, as well as other factors, the size of payments and royalty collection schemes vary greatly.

Types of royalties

Each franchisor sets the amount of royalty payments independently, as well as the payment scheme. At the same time, franchise authors have favorite techniques that are used in most cases, regardless of the type of business. The most commonly used types are: royalty payments:

• payment in the form of a certain percentage of sales volume
• payment in the form of a percentage of turnover or revenue
• fixed payment amount

In practice, these templates are modified by franchisors to make the franchise both effective and attractive to franchisees. The schemes depend on the industry in which the franchise operates.

Product franchises most often waive royalties altogether. The fact is that for product franchises it is more profitable for the franchisee to purchase more branded goods from them and sell them through their outlet. That's why most people work without royalties , or technology. Often, royalty payments are included in the purchase price of goods in the form of a markup.

Sometimes franchises that provide services also operate without royalties. In this case, royalties are replaced by purchases Supplies, as, for example, in the HOTFIX Russia network, which provides thermal insulation services for premises. Head of Department wholesale sales Olga Isachenko explains:

“We decided to refuse royalties. Instead, franchisees are provided with a minimum volume of material purchases that they can use directly in their work. The monthly purchase amount is about 180,000 rubles. Every six months we check the purchasing schedule with our franchisees. If the conditions for it are not met, we, as a rule, do not renew the contract.”

Regardless of the franchise area of ​​operation, one of the most popular types royalties remain charging a percentage of the volume revenue received. 5% of revenue is the royalty rate at Techprint. Its head Alexey Frolov says:

At the same time, Techprint, like many other franchisors, give their franchisees time to to "get back on your feet". Launch own business and payment of a lump sum payment require fairly large cash injections. At first, any enterprise operates at a loss; it needs certain time to at least break even. This is why many franchises provide for a deferral of royalty payments for several months. The period for which payments are deferred is set at the discretion of the franchisor.

In addition to deferring payments to reduce the initial financial burden on franchisees, some companies transfer part of the lump sum payment to royalties. This is what the Best Credit Finance credit brokerage franchise does.

During life cycle franchisees change and the royalty amounts they pay change. By paying a reduced lump-sum fee, the franchise buyer initially pays 50% of his revenue as a royalty. When the part of the lump sum included in these payments is paid, the royalty conditions change: the payment is already 10% of the commission received by the broker.

Even when using a percentage fee structure, some franchisors provide a minimum fixed royalty amount.

This rule also applies to Best Credit Finance. If 10% of the franchisee’s commission turns out to be less than 500 USD, he will still have to pay this amount. The minimum amount is set depending on the size of the lump sum payment. For those who paid 600,000 rubles instead of 1,300,000 rubles to join the franchise, the minimum royalty payment is 1,000 USD.

Many franchises on payments fixed amounts are building their entire royalty system. This way the payment system becomes transparent for both the franchisee and the franchisor. Fixed royalty amounts are used by the Umnichka Children's Eco-Club franchise. CEO company Sofya Timofeeva explains:

“The established royalty amount allows franchisees to live a calm and planned life, and honestly show us their income. By analyzing income reports, we provide franchisees with advice on how to improve operations.”

Moreover, even by setting a fixed royalty amount, the franchisor can reduce the initial financial burden on the business of its franchisees. For this the company gradually increases size fixed payments. At first, a newly minted manager needs to understand the business itself and rebuild business processes, which is why companies do not set large royalty amounts right away. Over time, the franchisee establishes the operation of his business, income from it grows, and with it the amount of royalties grows.

Most often, the fixed royalty amount is calculated in rubles, but franchisors can choose your own currency, in which the franchisee will pay them. International franchise networks may choose US dollars as their payment currency. For example, the JumpingClay franchise, whose roots go back to Korea, set a royalty of $300. The general director of the company in Russia, Maria Veselova, says:

“The amount and currency of royalties are determined by the international rules by which we work”

The main copyright holder of the JumpingClay brand is a Korean company that is developing new training programs and new items in the product range. This is where 75% of royalties go. The remaining portion of the royalty proceeds is used to develop the brand in Russia.

As you can see, royalty collection schemes can vary greatly among different franchises. The franchisor company has the right to set the payment calculation scheme, the amount of payments and even the currency independently. However, royalty calculations are always structured so that the franchisee’s business does not wither in the very first months of operation, but begins to bring in stable income, including the franchisor.

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Use of the subject of the license agreement. In practice, ROYALties are established in the form of fixed rates as a percentage of the cost of net sales of licensed products, their cost, gross profit, or determined per unit of output.

Dictionary of financial terms.

Royalty

Royalty is a license fee in the form of periodic interest payments, which are set in the form of fixed rates based on calculation of the actual economic result of using the license and are paid by the licensee at certain agreed intervals.

In English: Royalty

Synonyms: Royalty

See also: License agreements

Finam Financial Dictionary.

See what "ROYALTY" is in other dictionaries:

royalties- For each premium product released for sale, the OCOG pays a royalty. The procedure for paying royalties is specified in detail in each agreement with a marketing partner. The partner is obliged to fully report on this issue to the OCOG. [Department... ... Technical Translator's Guide

Royalty- Royalty - 1. Compensation regularly paid for the use of a patent, copyright, property of another person in the form of a certain percentage of deductions from the volume of income, sales volume of products, its cost, ... ... Economic and mathematical dictionary

- (English royalty) periodic compensation, usually monetary, for the use of patents, copyrights, natural resources and other types of property, in the production of which these patents, copyrights were used... ... Wikipedia

- [English] royalty royal power; royalties to the author] econ. 1) periodic royalties for an invention or KNOW-HOW purchased under a license, paid to the licensor (LICENSOR) during a certain period specified in the license... ... Dictionary of foreign words of the Russian language

License fee, license fee; fee, remuneration, deduction, payment Dictionary of Russian synonyms. royalty noun, number of synonyms: 6 remuneration (26) ... Synonym dictionary

- (English royalty) compensation for the use of patents, copyrights, natural resources and other types of property, paid as a percentage of the cost of goods and services sold in the production of which patents were used... ... Legal dictionary

See Royalty Dictionary of business terms. Akademik.ru. 2001... Dictionary of business terms

- (English royalty, from medieval French roialte, from Latin regalis royal, royal, state), type of license fee; periodic interest payments (current payments) to the license seller,... ... Modern encyclopedia

See ROYALTY. Raizberg B.A., Lozovsky L.Sh., Starodubtseva E.B.. Modern economic dictionary. 2nd ed., rev. M.: INFRA M. 479 p.. 1999 ... Economic dictionary

Royalty- (English royalty) 1) periodic royalty for the use of inventions, patents, know-how, publication of books, rental of films, etc.; 2) rent payment for the right to develop natural resources paid by the entrepreneur to the owner of the land... ... Encyclopedia of Law

Books

• Regulatory and legal principles of selection and seed production. Textbook, Berezkin Anatoly Nikolaevich, Minina Elena Leonidovna, Malko Alexander Mikhailovich. The main goal of the proposed teaching aid is consideration legal framework selection and seed production, systems for collecting selection remuneration (royalties) for the use of protected...

Tax regulation of royalty payments is the subject of both domestic and interstate legislation. In this article we will reveal the main tax risks that arise when paying royalties to both Russian and foreign organizations.

What is royalty under Russian law?

Russian legislation does not contain separate concept"royalty". At the same time, part 5 of Article 1235 of the Civil Code of the Russian Federation provides for payment of remuneration stipulated by the license agreement.

Royalties and international law

The concept of royalty is a widely used international law term used in many double tax treaties.

An example is the following interstate documents:

• Convention between the Government of the Russian Federation and the Government of the Italian Republic of 04/09/1996 “On the avoidance of double taxation with respect to taxes on income and capital and the prevention of tax evasion”,
• Convention between the Government of the Russian Federation and the Government of the Czech Republic of November 17, 1995,
• Convention between the Government of the Russian Federation and the Government of the Kingdom of Saudi Arabia dated February 11, 2007,
• Convention between the Government of the Russian Federation and the Government of the Hellenic Republic of June 26, 2000,
• Convention between the Government of the Russian Federation and the Government of the Kingdom of Spain of December 16, 1998 and many others.

All of the above conventions, translated into Russian, give an identical definition of the term royalty.

Therefore, the answer to the question what are royalties are payments of any kind received as compensation for the use or grant of the right to use any copyright in works of literature, art or science, including motion pictures or films, recordings and other means of demonstration or sound reproduction, any patent, trademark, design or model, plan, secret formula or process, or for the use or right to use industrial, commercial or scientific equipment, or for information relating to industrial, commercial or scientific experience.

Thus, it is obvious that tax regulation of royalty payments is the subject of both domestic and interstate legislation.

Royalty taxation and risks

Let's look at the most common risks when paying royalties.

VAT

Realization of rights to use the results of intellectual activity exempt from VAT in accordance with subparagraph 26 of paragraph 2 of Article 149 of the Tax Code of the Russian Federation.

This applies equally to both Russian and foreign organizations. In relations with foreign companies Russian company will act as a tax agent in accordance with the provisions of Article 161 of the Tax Code of the Russian Federation. This position, in particular, is adhered to by the Ministry of Finance of the Russian Federation in letter dated 01.02.2016 No. 03-07-08/1441.

Payment of royalties in favor of foreign organizations

In the case of royalty payments in favor of foreign organizations, additional tax legislation applies, both national and interstate.

The payment of royalties to a foreign company is for it the receipt of income from sources in Russian Federation, in connection with which, the organization paying such income can act as a tax agent in accordance with the provisions of Article 310 of the Tax Code of the Russian Federation.

At the same time, agreements on the avoidance of double taxation, as a rule, provide for conditions that allow the actual recipient of income in the form of “royalties” to tax the specified income in accordance with its national legislation.

National legislation, in turn, often provides for lower rates compared to Russian tax legislation or the absence of taxation of the corresponding group of income as a whole.

The right to calculate income tax

To confirm the right to calculate corporate income tax in the manner prescribed by the relevant double taxation agreement, foreign company must meet certain criteria, which are provided for by both national legislation and international acts.

Royalties are payments that a franchise buyer pays regularly (usually monthly) to a company for using its brand, experience, business reputation and technology.

So, the franchisee (buyer of the franchise) makes periodic payments to his franchisor (seller of the franchise) for the use of his intellectual property (once again to the question of what royalties are in a franchise).

Companies decide for themselves exactly how to determine the royalty amount. As a rule, the franchisor sets a certain percentage of turnover or margin, or its income is directly generated through the supply of its products to the franchisee. Also, the franchise seller can set a progressive or regressive scale of deductions.

*Margin is the difference between cost and price.

The amount of payments charged to the franchisee is set based on the cost of the services that the company provides to him and those services that are purchased for the entire franchise network. If the company chooses the “percentage of turnover” format (for example, 10% monthly), it means that the partner must pay a royalty in the amount of 10% of sales for the past month.

"Our company is interested in the development of partners, since the more they earn, the more we receive. And it is very important for us to give everything effective tools to its franchisees for successful development business. In fact, we play the role of investors. Initially, the company gives more than it receives from the franchisee partner. We start making money on a franchise only when its buyer reaches a turnover of 2 million rubles, and we receive 80 thousand rubles from him in the form of royalties.

The choice of percentage not from turnover, but from margin is usually typical for the franchisor, who clearly regulates pricing policy online and, in fact, it sets a certain percentage of the markup on the product. As a rule, these are those companies that can influence wholesale and retail prices. And if the markup level for a particular product is different, then this form of royalty calculation is the most optimal.

Some companies make a profit from the sale of a franchise only due to the fact that franchisees purchase products from them. More orders - more profit. And no payments.

What are lump sum fees and royalties? What is the difference? A royalty, just like a lump sum fee, is a payment for granting the right to use the franchisor’s intellectual property. The lump sum fee is a one-time and fixed amount that the franchisee pays upon concluding a concession agreement. For more information about what a lump sum contribution is, read the article . In turn, royalty payments are regular. It can represent a fixed amount, but is more often in the form of an interest rate.

So, you can choose a franchise without royalties at all or with payments in the form of a percentage of turnover or margin. However, no matter what type of payment the franchisor sets, the main thing is to know what you are paying for and whether the assistance provided is really worth it.

Royalty is a periodic payment, monetary compensation for the use of copyrights in various fields, patents, trademarks, know-how, that is, any intellectual property.

In order to minimize taxation when using intellectual property, most often this property is given ownership to a tax-free offshore company (hereinafter referred to as the copyright holder).

This scheme is absolutely legal and does not contradict the law.

But these jurisdictions do not have Double Tax Treaties with developed countries(including with Russia) therefore, when paying royalties directly to an offshore company in the country from which the transfer will be made, a withholding tax arises, in our case it is a tax on the territory of the Russian Federation, the rate is 20%, according to Art. 309 of the Tax Code of the Russian Federation.

Optimization of taxes in Royalty

To optimize taxation when paying royalties a transit intermediary must be included in this scheme registered in a country with which the Russian Federation has an Agreement for the Avoidance of Double Taxation.

Theoretically, this could be a resident company of Austria, Finland, Sweden, etc.

But if we take into account the cost of registering and servicing companies, the availability of the most relaxed conditions for doing business, and the tax rate, then the choice clearly stops at Cyprus.

Thus, the offshore copyright holder transfers to the Cypriot (resident) company - licensee a license to use intellectual property, as well as the right to issue sublicenses.

Thanks to this chain, there is no withholding tax in Russia, thanks to the Double Taxation Agreement with Cyprus.

In Cyprus, the difference between royalties received and paid is taxed, the tax rate is 10%.

Accordingly, if you reduce this difference, you can reduce taxation. According to Cypriot law, there is no withholding tax on outgoing royalties in Cyprus. There are also no taxes on royalties and income offshore.

Pitfalls of legislation

In order to avoid paying taxes at source in Russia, it is necessary to fulfill certain requirements, since royalties related to “other expenses associated with production and sales” (Article 264 of the Tax Code of the Russian Federation) must be documented and economically justified:

• The Cypriot company must provide the Russian company with a document confirming its location in Cyprus (clause 1 of Article 312 of the Tax Code of the Russian Federation). This document is a Tax residence certificate (and only this document!), certified by the Ministry of Finance of Cyprus, apostilled and translated into Russian. The period for which the residence status of the Cyprus company is confirmed must coincide with the period of royalty payment. The document must be provided before the royalty is paid.
• Also, according to Art. 1484 of the Civil Code of the Russian Federation, in order for royalty payments to be included in the tax base of expenses, it is necessary to use the intellectual property object in any legal way - on signs, in advertising, applying a trademark to products, etc.
• According to Art. 1490 of the Civil Code of the Russian Federation, a license agreement between Russian and Cypriot companies must not only be concluded in writing, but also be registered in a special government agency Rospatent. Otherwise, the license agreement will be considered invalid.

VAT

One more important point is VAT when paying royalties to a foreign company.

When Russian company acquires the rights to use intellectual property from a foreign company, then the foreign company must be a VAT payer.

Since Russia is recognized as the place of sale of these services (subclause 4, clause 1, article 148 of the Tax Code of the Russian Federation).

If a foreign company is not registered with the tax authorities of the Russian Federation, then the Russian company is obliged to act as a tax agent for VAT. That is, withhold VAT from foreign partners and pay it to the budget simultaneously with the transfer of royalties.

VAT amounts can then be deducted (Article 171 of the Tax Code of the Russian Federation). According to sub. 26 clause 2 art. 149 of the Tax Code of the Russian Federation, rights to know-how, databases, industrial designs, computer programs, utility models, topologies of integrated circuits are not subject to VAT.

Royalty is great way tax optimization, where the use brands and patents is economically feasible. You should always ensure that royalty amounts do not deviate from the market ones.

It is necessary to carefully maintain all documentation, and always have at hand confirmation that the intellectual property is actually being used.

The licensee and sublicensee companies must not be affiliated entities.

These simple points will help you avoid unnecessary questions. tax authorities, and as a consequence - additional taxes.