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Intellectual property taxes

Owning intellectual property means that it can be used for commercial purposes. Intellectual property taxes are levied on transactions related to such transactions. That is, from the income received under licensing or alienation agreements, deductions must be paid to the budget of the country where the transaction took place.

Tax legislation provides: both parties to the transaction are obliged to reflect in tax reports and accounting documents the fact of payment / receipt of remuneration for the use of intellectual property. But only one of them will pay copyright tax. Who exactly is determined by accounting and tax practice.

SION’s specialists are engaged in tax consulting. When concluding a copyright agreement, we advise you on how to properly draw up the reporting so that the tax office does not have any questions. We will give recommendations which of the parties should make contributions to the budget from the remuneration paid.

We work with residents and non-residents of Ukraine. When paying royalties to a non-resident, it is important to avoid double taxation. This can be achieved by agreements concluded between Ukraine and other countries (there are 75 of them). Typically, non-residents pay taxes in the jurisdiction where the liability originates. We will help you comply with international regulations.

Royalties accounting in Ukraine

By a general definition, royalty is the name of the remuneration received from the transfer of rights for the use of an object. It provides for payments under license agreements, but not under divestiture agreements. Objects can be artistic, literary or scientific works, computer programs, video recordings, patents, trade marks, know-how, etc.

According to Ukrainian accounting practice and legislation, each license fee (for use, not acquisition of rights) will be attributed to royalties. This includes both recurring and one-time lump-sum payments. For the author (copyright holder, licensor) they will be recorded as income, for the licensee – as expenses.

It is often difficult for accountants to display royalties in accounting records. If you are faced with such a problem, the employees of our company will give detailed advice.

Royalties in the Tax Code of Ukraine

Property rights to intellectual property objects can be transferred under contracts. For this, a reward is provided: a one-time (lump-sum) payment, interest deductions or in a combined form. Royalty taxes under licensing agreements are regulated by the TCU.

They need to be considered from two sides – the author who receives the income and the payer. For the payer, expenses will relate to the reporting period in which they were incurred, that is, when the payment was actually transferred under the contractual terms. If the costs can be correlated with a specific object, then they are allowed to be included in the cost of goods or services.

According to the TCU, royalties are included in passive income. A lump-sum fee (a one-time, fixed payment that is paid by the licensor prior to commercial use of the property) is also considered income. Profit tax (18%) and military duty (1.5%) are paid on the lump-sum payment and royalties.

If the author is a non-resident, then, according to the Tax Code, special rules apply to him. It is subject to a reduced income tax of 15% (and not 18%, as for residents). If he is a legal entity, repatriation tax is also paid from his income, that is, on the income of non-residents received in Ukraine. It is entered by a resident who transfers funds to a non-resident legal entity.

Intellectual property commercial use

Exclusive rights are drawn up in order usage benefit myself. You can use an invented or invented object yourself. Or you can transfer it for use and earn royalties. To do this, you need to form a license agreement. Ideally, register it with the official intellectual property office (in Ukraine, it is Ukrpatent).

Commercial licenses types:

  • Exclusive – all rights are transferred for a certain period. The licensor loses the ability to independently use the facility in the agreed territory and issue other licenses there.
  • Non-exclusive – the rights are transferred, but the same amount remains with the licensor (author).
  • Full – all rights are transferred without territorial and time restrictions.
  • Patent – for the use of industrial property protected by patents and certificates (inventions, utility models, industrial designs).
  • Other types of licenses (non-patent, pure, companion, open, etc.).

Based on the interests and aspirations of the client, our lawyers will help determine the appropriate type of license – so that the client can profitably monetize the developments. Each of SION’s specialists has extensive experience in working with intellectual property objects, many of whom have more than 20 years.

Royalty in Ukraine

The amount of remuneration for the use of patents, trademarks, copyrights can be calculated. When it comes to royalties, it is calculated as a percentage. The royalty rate can be calculated by assessing the market value of the intellectual property right, based on the analysis of domestic and foreign markets. For example, by such methods:

  • As part of the licensee’s profit (25% rule).
  • Use of standard rates for various industries. There are pivot tables showing the recommended percentages.
  • Calculation based on the indicators of the economic activity of the company.
  • Comparison with similar agreements.
  • Analysis of the judicial practice of determining rates.

The highest rates (up to 30%) are assigned if the object is protected by patents or certificates in different countries. The lowest, if it is not documented and entered in the registers. An exclusive license will provide a higher percentage of income for the author (up to 5%) than a non-exclusive license. The longer the term of the license agreement, the lower the deductions. There are other significant factors that we take into account while working.

Our experts will conduct an evaluation and help you find the optimal bet size. We are guided by the interests of our clients. We set realistic figures, substantiate them mathematically, and provide calculations.

Royalty transactions calculation

From an accounting perspective, license fees are payments for the use of intangible assets. They can be entered into documents as follows:

  • If this is income (receipt of remuneration) – a paired posting of debit 373 “Calculations of accrued income” – credit 719 “Other income from operating activities”. The lump-sum contribution is also considered income.
  • If this is a settlement with the author (royalty payment) – correspondent accounts 685 “Settlements with other creditors” and 92 “Administrative expenses” or 93 “Sales costs”, or others.

These are only recommendations, the company can independently determine the appropriate accounts. SION specialists will advise on how best to do this in a particular case, based on how the tax authorities usually look at these points.

Royalty agreement

The amount of deductions and the procedure for their payment is stipulated in the license agreement. The document is drawn up according to a certain structure. It is important to observe it in order to transfer rights in the proper amount, avoid ambiguous interpretation and protect your benefits. The document clearly states the object, the possibilities of its use, the period, the territory of action, the amount and procedure for payment of remuneration.

Our lawyers specialize in drafting and concluding such agreements. We have extensive experience and understanding of how to prescribe conditions so that the client does not lose. Clients can be both authors (copyright holders) and companies planning to use the object in their activities.

Copyright taxes

The taxation of author’s honorarium is specific. In this case, the fee is the amount of money received by the creator or his successors for the use of the work. This can be publishing, reproducing, distributing, importing, etc. Remuneration is due for scientific, literary, musical and other work. The size is set in the contract, the minimum rates are regulated by law.

Amounts of remuneration received by an individual are taxed on copyright income at a rate of 18% (in accordance with Articles 170.3, 167.5.1 of the TCU) and a military duty of 1.5%. If the licensee is a company (it pays the royalties), and the licensor (author) is an individual, the tax is withheld and paid by the company (at the expense of the author). If the latter is an entrepreneur, then it is important to avoid paying double taxes.

If the property rights to an intangible asset are alienated (bought), and not transferred under a license, a situation may arise when you need to pay VAT. Individuals who are not entrepreneurs or entrepreneurs who do not pay VAT are exempted from it.

Software licensing

A computer program is the result of creative work, which can be officially copyrighted. They can be owned by a developer or other person. They set clear rules for use by issuing a license. In Ukraine, this is most often a license agreement, which must be concluded in writing. Without it, the use of an IT product will be considered illegal.

License agreements may govern the development or distribution of software in the marketplace. The following are subject to taxation:

  • publishing and sales of software products;
  • writing, testing, creating instructions;
  • data processing and equipment management;
  • creation of information technology systems and networks.

If the licensee obtains the right to use and sell the software, then the licensor must pay VAT on its fees. If the contract provides only for the usage of the program without the right to sell, then the remuneration can be defined as royalties. VAT is not paid on it, but income tax is paid.

IT specialists in Ukraine can use a simplified taxation system. Our experts will tell you which system is more profitable for the developer to choose. They will also advise on how to make tax payments and reflect this in the financial statements.

If you are interested in cooperation, send us an email: info@sion.ua.