The royalty agreement implies. Royalties in domestic business practice. Legislative justification for royalties

Often, organizations with foreign participation take the name from their foreign “mother”, because it is much easier to start an activity with a “promoted” brand. However, in this case, a Russian company becomes obligated to pay so-called royalties for the use of a trade name.

Royalty (eng. royalty - royal privileges) - periodic payment for the right to use a license for goods, inventions, patents, innovations, publishing books, renting films.

Based on business customs, royalties are paid monthly under the relevant license agreements on the right to use, for example, a trade name.

Within the framework of civil law relations, royalties will be remuneration under a license agreement #M12293 0 902019731 0 0 0 0 0 0 0 249627279(Clause 5 of Article 1235 of the Civil Code of the Russian Federation)#S. Russian legislation does not establish restrictions on the maximum amount of royalties paid under licensing agreements.

Therefore, the parties, based on free legal will, have the right to establish any reasonable value of such an agreement. These license agreements are subject to state registration, without which they are declared invalid ( #M12293 1 902019731 0 0 0 0 0 0 0 249365133 pp. 2, 3, 6 tbsp. 1232#S #M12293 2 902019731 0 0 0 0 0 0 0 249627279 para. 2 p. 2 art. 1235#S #M12293 3 902019731 0 0 0 0 0 0 0 346424057 clause 1 art. 1490 Civil Code of the Russian Federation #S )*1.

*1 Most often, when transferring rights to trademarks, a subtype of licensing agreement is concluded - a commercial concession agreement ( #M12293 4 9027703 0 0 0 0 0 0 0 395903771 Ch. 54 Civil Code of the Russian Federation #S ).

Income tax

For profit tax purposes, monthly payments (royalties) for the use of the licensor's invention (name) in the production of products are recognized as other expenses associated with production ( #M12293 0 901765862 0 0 0 0 0 0 0 346227452 subp. 37 clause 1 art. 264#S #M12293 1 901765862 0 0 0 0 0 0 0 345637623 subp. 8 paragraph 2 art. 256 of the Tax Code of the Russian Federation#S), and are taken into account when forming the tax base for income tax.

Such expenses based on #M12293 2 901765862 0 0 0 0 0 0 0 395445023 clause 1 art. 318 of the Tax Code of the Russian Federation #S are indirect and fully relate to the expenses of the current reporting (tax) period ( #M12293 3 901765862 0 0 0 0 0 0 0 395445023 clause 2 art. 318 Tax Code of the Russian Federation #S).

In accordance with #M12293 4 901765862 0 0 0 0 0 0 0 395117342 subp. 4 paragraphs 1 art. 309 of the Tax Code of the Russian Federation #S, income of a foreign organization (which is not related to its business activities in the Russian Federation, carried out through permanent representative offices) received from sources in Russia and subject to income tax withheld by the organization - the source of payment of income, includes income from use in the Russian Federation rights to intellectual property, in particular payments of any kind received by a foreign organization as compensation for the use (granting the right to use) of any patents.

The calculation and withholding of the amount of income tax on the specified income paid to foreign organizations is carried out by the Russian organization (tax agent) in all cases, except for the payment of income that, in accordance with international treaties (agreements), is not taxed in the Russian Federation, subject to presentation by the foreign organization tax agent confirmation provided for #M12293 5 901765862 0 0 0 0 0 0 0 395182877 clause 1 art. 312 Tax Code of the Russian Federation #S ( #M12293 6 901765862 0 0 0 0 0 0 0 395051804 subp. 4 p. 2 art. 310 Tax Code of the Russian Federation #S ).

As an example, consider a situation where a commercial concession agreement is concluded with a Swiss company.

According to #M12293 7 901714421 0 0 0 0 0 0 0 249299594 Art. 7 Tax Code of the Russian Federation #S and #M12293 8 901714421 0 0 0 0 0 0 0 249823888 clause 1 art. 12#S of the agreement between the Russian Federation and the Swiss Confederation of November 15, 1995 “On the avoidance of double taxation with respect to taxes on income and capital”, royalties arising in the Russian Federation and paid to a resident of Switzerland are taxed only in Switzerland if such a resident has the beneficial right to royalty

Provisions #M12293 9 901714421 0 0 0 0 0 0 0 249823888 clause 1 art. 12#S Agreements do not apply if the person beneficially entitled to the royalties, being a resident of Switzerland, carries out business activities in the Russian Federation (in which the royalties arise) through a permanent establishment located there, and the right or property in respect of which the royalties are paid is effectively connected with such a permanent establishment ( #M12293 10 901714421 0 0 0 0 0 0 0 249823888 clause 3 art. 12#S agreement). In the case under consideration, the activity does not lead to the formation of a permanent representative office of a Swiss company in the Russian Federation; therefore, it applies #M12293 11 901714421 0 0 0 0 0 0 0 249823888 clause 1 art. 12#S agreement and the Russian organization does not withhold corporate income tax from the income paid.

However, a non-resident is the recipient of royalties in accordance with #M12293 12 901765862 0 0 0 0 0 0 0 395182877 clause 1 art. 312 of the Tax Code of the Russian Federation #S must provide the tax agent with confirmation that he has a permanent location in a state with which Russia has an agreement (Switzerland) regulating tax issues. The confirmation must be certified by the competent authority of the relevant foreign state (apostille).

Value added tax

Based #M12293 0 901765862 0 0 0 0 0 0 0 248971910 subp. 4 paragraphs 1 art. 148#S and #M12293 1 901765862 0 0 0 0 0 0 0 294257334 pp. 1, 2 tbsp. 161 of the Tax Code of the Russian Federation #S, if a Russian organization pays a foreign company royalties under a license agreement, the subject of which is exclusive rights to an invention (trade name), then the Russian organization as a tax agent has the obligation to withhold and pay VAT on the amounts of remuneration paid to the foreign organization under a license agreement.

Taxation is carried out at a rate of 18% ( #M12293 2 901765862 0 0 0 0 0 0 0 294781628 clause 4 art. 164 Tax Code of the Russian Federation #S).

Based on the clarifications of the Ministry of Taxes of Russia, set out in letter dated September 24, 2003 N OS-6-03/995@ "On the procedure for calculating and paying value added tax", the tax base specified in #M12293 3 901765862 0 0 0 0 0 0 0 294257334 clause 1 art. 161 of the Tax Code of the Russian Federation #S, when selling goods (work, services) for foreign currency, determined by the tax agent, is calculated by recalculating the expenses of the tax agent in foreign currency into rubles at the exchange rate of the Central Bank of the Russian Federation on the date of sale of goods (work, services), i.e. . on the date of transfer of funds by the tax agent in payment for goods (work, services) to a foreign person who is not registered with the tax authorities as a taxpayer. The tax agent recalculates the tax base when selling goods (work, services) for foreign currency into rubles at the exchange rate of the Central Bank of the Russian Federation on the date of actual expenses (including if these expenses are advance or other payments) regardless of the adopted accounting policy for tax purposes.

The amount of VAT withheld from a foreign company is paid to the budget simultaneously with the transfer of funds to the foreign company under a license agreement ( #M12293 4 901765862 0 0 0 0 0 0 0 295699137

The amount of VAT paid by an organization to the budget as a tax agent is subject to deduction in accordance with #M12293 5 901765862 0 0 0 0 0 0 0 295436991 para. 1 clause 3 art. 171 Tax Code of the Russian Federation #S. The tax deduction is provided upon fulfillment of the conditions established #M12293 6 901765862 0 0 0 0 0 0 0 295436991 para. 3 p. 3 art. 171 Tax Code of the Russian Federation #S.

According to clause 16 of the Rules for maintaining logs of received and issued invoices, purchase books and sales books when calculating value added tax, approved. #M12291 901776354 by Decree of the Government of the Russian Federation dated December 2, 2000 N 914#S, all issued and issued invoices are recorded in the sales book in all cases when the obligation to calculate VAT arises, incl. perform the duties of tax agents. A similar opinion is shared by the Russian Ministry of Finance in letter dated 05/11/2007 N 03-07-08/106: “...It is advisable to prepare invoices in two copies. In this case, the first copy should be kept in the journal of issued invoices and registered in the Book sales, and the second copy - in the journal of received invoices and registered in the Purchase Book as the right to a tax deduction arises."

In tax accounting, positive (negative) exchange rate differences arising from changes in exchange rates are non-operating income (expense) ( #M12293 7 901765862 0 0 0 0 0 0 0 345703165 clause 11 art. 250 of the Tax Code of the Russian Federation #S), and with the accrual method, the date of receipt of the specified income is recognized as the last day of the current month ( #M12293 8 901765862 0 0 0 0 0 0 0 346882816 subp. 7 paragraph 4 art. 271 Tax Code of the Russian Federation #S).

Accounting

When concluding a license agreement, intangible assets (trade name) received for use are taken into account by the user on an off-balance sheet account in an assessment determined based on the amount of remuneration established in the agreement (clause 39 of PBU 14/2007 “Accounting for intangible assets”, approved #M12291 902081954 by order of the Ministry of Finance of Russia dated December 27, 2007 N 153н#S).

Since the Instructions for the application of the Chart of Accounts for accounting of financial and economic activities of organizations, approved. #M12291 901774800 by order of the Ministry of Finance of Russia dated October 31, 2000 N 94н#S, a separate off-balance sheet account is not provided for accounting for intangible assets received for use; an organization can open an account, for example, 012 “Intangible assets received for use.” At the same time, payments for the granted right to use the results of intellectual activity or means of individualization, made periodically, calculated and paid in the manner and terms established by the agreement, are included by the user (i.e., a Russian organization) in the expenses of the reporting period for ordinary activities (clause 5 PBU 10/99 "Expenses of the organization", approved #M12291 901735798 by order of the Ministry of Finance of Russia dated 05/06/1999 N 33н#S).

According to the Instructions for using the Chart of Accounts, these expenses are reflected on a monthly basis (as of the last date of the current month, subject to the conditions of clause 16 of PBU 10/99) in the organization’s accounting in the debit of account 20 “Main production” and the credit of the account for accounting settlements with the licensor, for example account 76 " Settlements with various debtors and creditors."

Example

Romashka LLC entered into a license agreement with the Swiss company Romashka to provide a trade name. Royalties payable monthly (by the 20th of the current month) under the agreement amount to $900,000.

Let's say the US dollar exchange rate on August 20, 2011 was 30 rubles, on August 31, 2011 - 31.5 rubles.

At the time of concluding the license agreement, the following entries must be made in accounting:

D-t 012 - the receipt of an intangible asset for use is reflected (in the assessment established by the contract);

D-t 76/60 K-t 68 - 4,118,644 rub. (900,000 * 18/118 * 30) - VAT is withheld from the amount paid to a foreign company under a license agreement;

D-t 76/60 K-t 52 - 26,588,155.92 rub. (900,000 - 900,000 * 18/118) * 30) - reflects the payment of royalties for August;

D-t 68 K-t 51 - 4,118,644 rub. - paid to the budget VAT withheld from the income of a foreign company;

D-t 20 K-t 76/60 - 24,025,423.72 rub. (900,000 - 900,000 * 18/118) * 31.5) - expenses associated with the use of exclusive rights are reflected;

D-t 19 K-t 76/60 - 4,118,644 rub. - reflected VAT paid on the income of a foreign company for August;

D-t 76/60 K-t 91-1 - 1,144,067.796 rub. (900,000 - 900,000 * 18/118) * (31.5 - 30) - reflects a positive exchange rate difference;

D-t 68 K-t 19 - 4,118,644 rub. - VAT paid to the budget is accepted for deduction;

At the expiration date of the contract:

Kt 012 - the cost of an intangible asset received for use is written off.

As noted above, the amount of VAT withheld from a foreign company is paid to the budget simultaneously with the transfer of funds to the foreign company under a license agreement ( #M12293 0 901765862 0 0 0 0 0 0 0 295699137 para. 2 clause 4 art. 174 Tax Code of the Russian Federation #S).

In accounting, the transfer of funds to a foreign company is reflected in the credit of account 52 “Currency accounts” and the debit of account 76. In this case, the withheld amount of VAT is reflected in the debit of account 76 and the credit of account 68 “Calculations for taxes and fees”. Payment of VAT to the budget is reflected in the debit of account 68 and the credit of account 51 “Current accounts”. The tax deduction for VAT in the amount paid is reflected in the debit of account 68 and the credit of account 19 “Value added tax on acquired assets.”

Maximum royalty limit

According to #M12293 0 901765862 0 0 0 0 0 0 0 345834237 Art. 252 of the Tax Code of the Russian Federation #S expenses are recognized as justified and documented expenses incurred by the taxpayer. Justified expenses mean economically justified expenses, the assessment of which is expressed in monetary form. Documented expenses mean expenses supported by documents drawn up in accordance with the legislation of the Russian Federation. Any expenses are recognized as expenses, provided that they are incurred to carry out activities aimed at generating income.

Based on this, the taxpayer must confirm the actual use of the trademark (company name) in activities aimed at making a profit. And the structure of expenses incurred by type of activity, including license fees, must correspond to the structure of the company’s income.

In other words, if the company’s income is $1,000,000, and license payments (royalties), for example, are $999,999, then, most likely, the tax authorities will recognize them as economically unjustified (unjustified) and aimed at understating the tax base on income tax.

It should be noted that according to #M12293 1 901714421 0 0 0 0 0 0 0 295633603 Art. 40 of the Tax Code of the Russian Federation #S for tax purposes, the price of goods (work, services) indicated by the parties to the transaction is accepted. Until proven otherwise, this price is assumed to correspond to market prices*1.

*1 On July 18, 2011, the President of the Russian Federation adopted and signed Law No. 227-FZ “On amendments to certain legislative acts of the Russian Federation in connection with improving the principles of determining prices for tax purposes” (see the article “Transfer Pricing Law: a brief overview " on p. 18).

However, based on #M12293 2 901714421 0 0 0 0 0 0 0 295633603 clause 2 art. 40 of the Tax Code of the Russian Federation #S, tax authorities, when monitoring the completeness of tax calculations, have the right to check the correctness of the application of prices:

For transactions between related parties;

For commodity exchange (barter) transactions;

When making foreign trade transactions;

If there is a deviation of more than 20% upward or downward from the level of prices applied by the taxpayer for identical (homogeneous) goods (works, services) within a short time.

In turn, in the situation we are considering, a licensing agreement with a foreign entity is a foreign trade transaction (or it is possible that the parties to the licensing agreement are interdependent persons), as a result of which the tax authorities have the right to check the price of the transaction and in the event of its deviation from the level of market prices by more than Additional 20% taxes and penalties.

Since trademarks (company name) are a purely individual thing, the tax authorities are unlikely to be able to determine the market price of specific licensing rights and defend their arguments in court. Although isolated cases of negative outcomes for taxpayers did occur (see, for example, resolution of the Federal Antimonopoly Service of the North-Western District dated October 6, 2005 N A66-5524/2004).

Thus, despite the fact that Russian legislation does not define the maximum amount of royalties under licensing agreements, if they are excessively high (deviation from market prices by more than 20%) for tax purposes, the tax authorities, based on #M12293 3 901714421 0 0 0 0 0 0 0 295633603 Art. 40 of the Tax Code of the Russian Federation #S, they can charge additional amounts of VAT and income tax.

periodic payments to the seller (licensor) for the right to use the subject of the license agreement, for example, a franchise, patent, copyright, trademark, logo, slogan, intellectual property, know-how, technology

A detailed definition of the concept of royalty, types of royalty, royalty amount, royalty method, frequency of royalty payment, royalty accounting, royalty tax, royalty agreement, royalty amount, royalty calculation, royalty exemption

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Royalty is the definition

Royalty - This 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, etc. were used. Can be paid as a percentage of the cost of goods and services sold, a percentage of profit or income. It can also be in the form of a fixed payment, in this form it has some similarities with rent.

Royalty is The franchise owner's income depends on the licensee's gross income, or perhaps represents a fixed amount stipulated in the agreement. Ideally, this is a measure and indicator of the income from the acquired franchise. In many ways, it is the royalty that determines how profitable the franchise is.

Royalty is payment for the services the franchisor provides to the business of the franchise partner. The franchisor's services may include: logistics, product research, marketing management, development and implementation of advertising campaigns, building and maintaining a system of relations with suppliers, staff training, and maintaining a corporate website. When calculating royalties, in addition to the cost of the franchisor's services, the costs of monitoring the activities of franchise enterprises are taken into account. In the service sector, royalties are an analogue of a wholesale markup on goods (wholesale markup on a service).

Royalty is type of licensing fee, periodic compensation, usually monetary, for the use of patents, copyrights, franchises, natural resources and other types of property in the production of which these patents, copyrights, etc. were used. Can be paid as a percentage of the cost of sales goods and services, percentage of profits or income. It can also be in the form of a fixed payment, in this form it has some similarities with rent.

Royalty is payments that have become widespread in franchising. In it, monetary compensation is charged for a trademark, logo, slogans, corporate music and other signs by which the end buyer can distinguish the company from its competitors.

Royalty- This periodic payments to the seller for the right to use the subject of the license agreement. In agreements, the R rate is established as a percentage of the cost of net sales of licensed products or is determined per unit of output; payment for the right to develop and extract natural resources.

Royalty- This periodic payments to the seller (licensor) for the right to use the subject of the license agreement. They are established as fixed rates as a percentage of the cost of net sales of licensed products, their cost, gross profit, or determined per unit of output.

Royalty is periodic royalties paid for the rental of films, the release of books, music discs, as well as the right to use a patent, invention or license for a product or technology. The licensee makes payments in favor of the license holder at agreed time intervals. The amount of payments is fixed in the form of a percentage rate, the basis of calculation is the economic benefit from the listed activities (for example, the cost of net sales or gross profit). Most often, the fee is a fixed percentage of the total sales price of the product.

Royalty is payments, also called royalties. The copyright holder receives royalties every time his intellectual property is used for commercial purposes (for each playback of a song or music, publication, etc.).

Royalty is remuneration to the seller (licensor) for granting the buyer (licensee) the rights to use a license, know-how, invention, trademark, other objects, subjects of the license agreement. Royalties are established based either on the actual economic effect of using the license, or on the expected profit of the licensee, not related in time to the actual use of the license. In the first case, percentage deductions are provided from the cost of the license purchase made and sold (royalties) or participation in the licensee’s profits. In the second case - payments of fixed amounts (fixed royalties) in accordance with the terms and provisions of the license agreement.

Royalty is, rewards paid to the creator or contributor to a creative work based on sales of its results to the individual/s. To be eligible to receive royalties, the work must be copyrighted or patented. Also, the royalty amount is usually fixed in the contract.

Royalty is a term used in some cases to refer to payments for the right to extract natural resources and develop deposits. In countries where natural resources are considered the property of the state or monarchy (such as the UK), royalties are a tax paid by businesses that specialize in extracting minerals. In the United States, where there is private property rights to subsoil resources, royalties are not included in tax deductions, but represent a rent payment for the use of resources.

There are different types of royalties, determined by the types of activities in which these payments are applied.

These types include royalties on natural resources, royalties in franchising, royalties in copyright.

Natural resource royalties

Natural rent is a payment for the right to develop and exploit natural resources.

Economic rent refers to the price (or rent) that is paid for the use of natural resources, the quantity of which (reserves) is limited. The problem of distributing seized rent between levels and structures of government can be solved in different ways. For example, in Canada and the USA, a significant part of income is accumulated in the regions - provinces and states, and the federal center has advantages in levying income taxes. In other states, central government structures concentrate royalties at home.

The withdrawal of rent by the state can also occur through the mechanisms of export duties on natural resources and various types of excise taxes. This policy is now typical for Russia.

In world practice, the state usually tries to seize and use rent for the needs of society through various mechanisms. For this purpose, a special tax is often used - royalties. It is often defined as a share of output or a percentage of raw materials produced. Royalties can reach up to 4-10% of the cost of extracted metal and up to 10-20% of the cost of oil and gas. When determining the size of royalties, one must strive for the optimal value in order to establish a reasonable combination of its role as, on the one hand, a means of increasing state taxes, and, on the other hand, its size should not become an obstacle to increasing production volumes.

In the USA, the process of subsoil development and hydrocarbon production is controlled by the government. Recoverable reserves are systematically recalculated, data on production parameters are sent to state regulatory authorities, where well drilling locations are approved and restrictions are imposed on the rate of mineral extraction. These measures directly or indirectly lead to the formation of conditions that ensure rational use of subsoil, as well as increased returns. To extract rent, instruments such as bonuses, rents, and royalties are used. At the same time, royalties are fixed.

The withdrawal of the main part of natural resource rent and its use is carried out not at the federal level, but at the state level. An example of a state that has effective legislation to regulate extractive industries is Alaska. There, most of the rent received in the field of oil production is directed into the economy for the development of production and social infrastructure, as well as for the creation of the Permanent Fund. It includes 25% of all state revenues from royalties and rents, as well as royalties, bonuses, and federal payments for mineral resources in the portion that is due to the state.

Rental industries in Canada

In Canada, the mechanism for providing subsoil for use is based on a licensing-lease system. The provinces are responsible for approximately 80% of all mineral resources, and the rest is in free use, that is, the property of private owners and the federal government. The provinces have a high degree of independence in the legislative sphere. This system of subsoil use is characterized by the predominance of state ownership of mineral resources, the absence of direct state participation in commercial projects related to the extraction of mineral resources, and the absence of additional requirements for subsoil users in terms of solving problems of socio-economic development of the territory.

Royalties on natural resources in Norway

In Norway, the government strives to ensure that as much as possible of oil revenues goes to the public. For this purpose, government regulation measures are used. Extraction of natural resources occurs on the basis of licenses. The country's tax system is characterized by consistency. It is based on a special sectoral income tax of 50% and a general income tax of 28%. The use of a special tax does not allow oil companies to use income from oil production to cover losses from other activities, thereby reducing the tax base. In addition, royalties, determined on a sliding scale, occupy an important place in the Norwegian tax system.

UK resource royalties

In Great Britain and Northern Ireland licensing is also used. Since 2002, these countries have applied a tax on income from oil and gas production of 10%, in addition to a 30% tax on corporate profits. A special tax is also used - royalty, which is paid on profits from hydrocarbon production. When calculating royalties, it is not allowed to reduce it due to losses from other types of activities, but it is possible to receive a discount in terms of the costs of developing another field until its payback. At the initial stage of field development, a special tax is not imposed on the part of the profit corresponding to 15% of profitability. To ensure the country's energy security and replenish strategic reserves, the state can collect royalties not only in cash, but in kind.

Royalty rental industries in Egypt

In Egypt, there are production sharing agreements that are concluded between the state oil company and foreign oil contracting companies. The latter undertake to provide financing at the exploration stage. The state compensates the contractor for the amount of investment upon discovery of profitable oil reserves and leases the field for a period of 20–30 years. Next, an operating company is created, which is owned in equal shares by two parties. The duration of the agreement cannot exceed 35 years. Despite the 50% participation of the state oil company, the operating company is considered private. Royalties are paid as follows. The state oil company supplies a certain share of the produced oil, equal to 10%, from its share in kind or cash to the Egyptian government. The contractor, in turn, pays corporate income tax in the amount of 40.55%. All taxes paid by a government company to a contractor are considered to be the contractor's profit.

Royalty on resources in Nigeria

Subsoil use relations in Nigeria are based on various forms of interaction. Licensing agreements provide for the payment of oil revenue tax and royalties, which are supplemented by production sharing agreements in accordance with shareholdings. Service agreements include a guaranteed minimum profit of $2.30 per barrel and bonuses for opening reserves. Another type of relationship is practiced when deposits are located in hard-to-reach areas of the country. The contractor bears the costs of exploration and production. If oil reserves are not discovered, the state does not compensate for exploration costs. If a deposit is discovered, production is divided as follows. The first part of the production is used to pay taxes, royalties and concession payments to the government. The second part of the production is oil intended to reimburse the contractor for capital investments and operating expenses within certain limits. Remaining product, i.e. the difference between the total oil production and the oil intended to pay taxes and reimburse costs is divided between the contractor and the national company.

Royalties in franchising

Royalty is one of the most important concepts of franchising, a monthly payment, the rate of which is set by the franchisor. The royalty rate is specified in the franchise agreement, and the frequency of payments is also approved during the negotiation of the terms of the contract.

The royalty amount usually ranges from 1 to 5% of the franchisee's gross income and depends on factors such as:

Prestige of the brand. The highest royalty rates are noted in the hotel business, since world-famous hotel chains extremely value their reputation and strive to protect themselves from cooperation with random entrepreneurs in this industry;

Potential profit size. When calculating the regular payment rate, the franchisor evaluates what benefits the new franchisee will receive from opening a store, how high the profitability is, the trade margin, and so on;

Franchise expenses, for example, if the company provided advertising materials free of charge, assisted in the design of the sales area and staff training, then the money spent can be returned not only thanks to a lump sum fee, but also to the royalty rate;

Costs for maintaining the franchisor’s own staff: accounting, marketing department, centralized supply service.

In franchising, as a rule, three royalty calculation schemes are used:

Percentage of turnover is the most common form of royalty calculation. Characterizes the franchisor's right to a share of the market developed by the franchising partner. The “percentage of turnover” option is used if the franchisor knows the sales volume at the franchise enterprise;

Margin percentage – the franchise partner pays a certain percentage of the difference between the retail price and the wholesale purchase price. This option may be most interesting for a franchise partner whose store has different markup levels for different groups of goods. The “margin percentage” option can be used if the franchisor clearly controls the price and cost of wholesale purchases and retail sales at the franchise enterprise;

Fixed royalties are a single regular payment amount tied to the cost of the franchisor’s services, time of year, store area, number of enterprises, number of customers served, inflation, life of the enterprise, etc. Fixed royalties are typical for the service industry, where it is sometimes impossible to accurately determine the amount of income of a franchise partner. For example, tourism, fast food, restaurant business;

Combinations of the above options are possible. For example, “percentage of turnover, but not less...”. Less common is the option “percentage of turnover, but no less.. and no more...”.

The most common frequency of royalty payments is as follows:

Preliminary is the most optimal frequency for the franchisor to collect royalties from franchise partners. Most often it is implemented in agency schemes, when money, at the time of receipt from the final buyer, is first transferred to the franchisor’s account, and only then part of it goes to the account of the franchise partner;

Weekly or 2 times a month – payment of royalty payments occurs once a week / 2 times a month;

Monthly – payment for royalties occurs once a month, usually the receipt of money for the month is carried out no later than the 5th day of the next month. The most risky form of revenue collection, because money may “get stuck” with the franchise partner.

Royalties in copyright are a periodic payment to the copyright owner for each public use of his product. This may include commercial use of music, films and any other types of intellectual property. In the West, the question of paying royalties is a normal practice, but in our country a number of television channels and enterprises in the entertainment, consumer services, and transport sectors evade such payment. For most, it remains strange and incomprehensible why one has to pay for using someone’s copyrighted products for one’s own purposes.

The amount of royalties in practice is a fixed rate, which is paid to the owner of the rights after a previously agreed period of time, while the agreed contract has legal force. Unlike a commission or royalty fee, a royalty is not a one-time bonus. The amount of royalties is calculated from the net sales price of the licensed product, gross profit, cost, or is fixed based on the unit price of the product sold. The most common method is to charge a percentage of the selling price of the product.

Full or partial reproduction of a work in material form (reproduction);

Presenting a work to the public in intangible form by placing it as an exhibition, image, as part of a radio and television broadcast, etc.

Royalty calculation methods

Royalties are used for settlements with the licensor in 80 - 90% of cases when licensing agreements are concluded. In the literature, the royalty amount is defined as “reasonable” or “fair”. Obviously, this should be the case for both parties to the transaction. Royalties must not only justify the costs of the licensee and bring him profit, but also bring income to the licensor necessary for further research, partially compensating for the costs of scientific research on the creation of the licensed object and the preparation of licensing documentation, and in the pharmaceutical industry - for conducting research necessary for the creation and registration of new drugs.

Royalties are usually represented by a rate P (in foreign literature the letter R is usually used), expressed as a percentage of the base - the effect (result) of the licensee (buyer). The following can be used as a base:

Gross income (effective gross income, sales amount, sales volume);

Net income;

Additional profit (arising from the enterprise that purchased and uses IP);

Price of a unit (batch) of products;

Cost price;

Unit capacity of the workshop (production);

Cost of main processed raw materials, etc.

The table shows standard (approximate) royalty rates used by specialized large foreign trade organizations in relation to such a base based on an analysis of global practice in concluding licensing transactions in various industries.

Royalty rates for industrial properties

The absence of a patent, as a rule, reduces the royalty rate by 10 - 30% compared to a similar object transferred under a patent license. Based on the fact that the cost of design documentation usually amounts to up to 30% of the cost of the entire package of technical documentation, when transferring only design documentation under a license agreement, it is advisable to reduce the royalty amount to 30% of the standard (tabular) rates. The standard royalty rates P indicated in the table usually apply to such types of industrial property as inventions.

Royalty rate for know-how

If the license is for the transfer of know-how, the P value is usually reduced by 20 - 60% (compared to the table), depending on a number of factors. For example, it decreases by:

20-40% if the intellectual property is transferred under a simple (non-exclusive) license;

20-40%, if the development of intellectual property requires significant capital investments (for example, for additional research);

40-60% if the know-how is transferred to IP that is known on the market, but is still of interest to the licensee;

70-80% if not the entire package of technical documentation is transferred, but only the design documentation.

There is a tendency to increase the importance of OIP in the creation of new technologies, products, services, and therefore in practice there are increasingly cases where the P rate is taken equal to 20% and even 50% of the additional profit (or NPV - adjusted net income), the source of which is an assessed knowledge-intensive OIS.

When evaluating IP for licensing purposes, the guidelines for adjusting the royalty rates shown in the table can be used.

Royalty rates for copyrighted objects

Remuneration to the author (copyright holder) in the form of royalties, in relation to objects of copyright (in particular, literary works) has a number of features. Below are the main modern forms of royalties used for copyrighted objects.

According to it, the author receives a certain percentage of the entire turnover, the proceeds of the copyright recipient (licensee), without any changes, depending on how many copies the copyright recipient (licensee) sells. This system is very simple and understandable; it is quite often used in practice.

Degressive royalty

According to it, the author receives a certain percentage, which decreases with an increase in sales of copies of the work or with an increase in the income of the recipient. For example, when selling for the first 100 thousand copies. - 10% remuneration, for the next 100 thousand - 9%, etc. When interest rates are calculated correctly, this system satisfies the interests of both the author and the recipient. It is used quite often in Western countries.

Progressive royalty

As sales volume increases, the rate of remuneration paid to the author increases. This system may hinder the promotion of sales of the work by copyright recipients. However, if demand for a work grows, such a system may be acceptable to both authors and copyright recipients (licensees).

Profit-based royalties

The basis for calculating the author's remuneration is profit from the sale of copies of the work, and not gross income. This system is often found in copyright agreements concluded by Russian authors. For them, such a condition is extremely unfavorable, since doubts often arise about the correctness of the calculations made by the recipient (licensee). And there may be intractable disputes over the amount of remuneration.

System, minimum royalty time

This form is often used if the author (copyright holder) intends to speed up the sale of copies of the work. In this case, the copyright recipient (licensee) provides the author with a lower amount of payments for a certain limited period. This form is used when intensifying the sale of a product that brings high profits, or when targeting a product to identify buyer groups and distribution channels. The disadvantage of this form is that beneficiaries seek to extend the validity of discounts by any means.

Minimum Royalty System

Recently, the practice of stipulating in the copyright agreement the obligation of the copyright recipient to guarantee a minimum royalty amount has become widespread, which encourages the copyright recipient (licensee) to intensify the sale of copies of the work.

Minimum price system

A system that fixes the minimum selling price of a copy of a work, from which royalties will be calculated, has a similar goal to the system of a guaranteed minimum royalty. The fact is that the recipient (licensee) may be able to sell legal copies of the work at reduced prices to subsidiaries of the licensee. This makes it possible to hide significant amounts of income from sales from the author (copyright holder). In this regard, it is considered appropriate to include in the copyright agreement a condition determining the size of the sale price of copies of the work, from which the royalty is calculated.

Legal aspects of royalties

The concept of royalty can be attributed to several legal areas. Thus, it is used as one of the forms of payment under an agreement in the now widespread franchising sphere and denotes copyright and license payments for the commercial use of intellectual property belonging to another person (patent, trademark, work of art, etc.).

And finally, royalties in economics and land law (a term used in world practice) are rent payments for the right to develop natural resources paid by an entrepreneur to the owner of land or subsoil.

The legal relations of the parties regarding royalties related to franchising activities are regulated by Chapter 54 of the Civil Code of the Russian Federation (the basis of the relationship: a commercial concession agreement). In accordance with paragraph 4 of Article 1027 of the Civil Code of the Russian Federation, all rules of the Civil Code of the Russian Federation on a license agreement are applied to the commercial concession agreement. The only difference between a commercial concession agreement and a license agreement from a legal point of view is the object of the agreement. In a commercial concession agreement, an object is a set of exclusive rights, while in a license agreement it is the right to use an intellectual property object. Based on clause 2 of Art. 1028 of the Civil Code of the Russian Federation, a commercial concession agreement is subject to state registration with the federal executive body for intellectual property (Rospatent). According to the general rule of Art. 1031 of the Civil Code of the Russian Federation (which can be amended by agreement), a commercial concession agreement must be registered by the copyright holder (franchisor). If the registration requirement is not met, the contract is considered void (according to Article 1031, paragraph 2 of Article 1028, paragraphs 3,6 of Article 1232, paragraph 1 of Article 1490 of the Civil Code of the Russian Federation).

Relations between individuals (authors) and persons receiving exclusive rights to works are regulated by Chapter 70 of the Civil Code of the Russian Federation. It determines that the relationship must be confirmed in writing in the form of a certain type of agreement. These are types of contracts such as:

Agreement on the alienation of the exclusive right to a work and the right to use the work under a license (Article 1285 of the Civil Code of the Russian Federation);

License agreement granting the right to use the work (Article 1286 of the Civil Code of the Russian Federation);

As for royalties in the economy, from the point of view of world practice, the mineral extraction tax introduced in the Russian Federation in 2002 actually currently performs the functions of a royalty (payment to the owner of resources for the right to develop reserves).

It is necessary to dwell separately on agreements with foreign counterparties, because a question arises about the applicable law (Russian or foreign). According to paragraph Art. 1211 of the Civil Code of the Russian Federation, by default, the law of the country with which the contract is most closely related is applied to the contract. The relations of the parties under the license agreement are governed by the law of the state where the licensor is located. At the same time Art. 1210 of the Civil Code of the Russian Federation allows the parties to an agreement to choose the law that is subject to application to their rights and obligations under this agreement. When applying Russian law, relations automatically fall under the regulation of Part 4 of the Civil Code of the Russian Federation.

Taxation of royalties

Abroad, the tax on the amount of royalties is set, as a rule, in the range of 10 - 40%. At the same time, the tax on successively paid royalties is often higher than on consecutive royalties. In some countries, especially in tax havens, royalty payments are not subject to taxes at all. In addition, thanks to the tax credit system in Western countries, when transferring profits from a foreign branch in the form of royalties, an international company receives tax credits in the home country for the amount of taxes paid abroad.

In modern conditions in Russia, the method of transferring profits is through the mechanism of paying royalties, commissions for management services, etc. has special meaning. Until January 1, 2002, our tax legislation did not clearly regulate the procedure for the acquisition of licenses and know-how by organizations (in the Instruction of the Ministry of Taxes of Russia “On the procedure for calculating and paying the income tax of enterprises and organizations to the budget” No. 62 of June 15, 2000, income and expenses in the form of royalties and commission payments are not allocated). This reduced the effectiveness of state control over the export of funds abroad and reduced potential budget revenues. In addition, the taxation of royalties based on agreements concluded by our country to eliminate double taxation is generally more preferential in nature compared to the tax regulation of repatriated dividends, which serves as an additional incentive for the use of license fees to export income from Russia.

Due to the fact that not all payments for the transfer of the right to use objects of intellectual property rights are royalties in the terms of the Tax Code, many taxpayers may have difficulty reflecting transactions with royalties in the Tax Return for corporate income tax.

In order to eliminate errors when filling out the Tax Return for corporate income tax, we will dwell on this issue in more detail.

Royalty amounts are included in income:

From operating activities (line code 02 of the Tax return for corporate income tax);

Other income (line code 03 of the Tax return for corporate income tax).

Income from operating activities includes royalties accrued under contracts in accordance with which work is performed and services are provided.

Conditional example. Under a license agreement, the developer of a computer program (licensor) transferred the rights to sublicense to the distributor (licensee). Under a sublicense agreement, the licensee transfers the rights to use a computer program to the end user (sublicensee). For each license to use a computer program sold, the licensee accrues a royalty to the licensor in the amount of 70 percent of the cost of the license provided to the end user. Royalties accrued by the licensee for transferring the right to use a computer program to the end user are included by the licensee in operating income.

Other income includes royalties as passive income (clause 14.1.268 of Article 14 of the Tax Code). In order to verify this, just look at Appendix “ID” to line 03 of the Tax Return for Enterprise Income Tax (line code 03.2).

Conditional example. Under a licensing agreement, the owner of a patent for an invention, the exclusive property rights to which are recognized as his intangible asset, granted an industrial enterprise a license for a method for manufacturing industrial products. For the use of the invention, the industrial enterprise transfers a monthly royalty to the owner of the patent. This royalty is passive income for the patent owner.

Minimizing royalty tax

It has already become a classic way of structuring royalty payments through the use of a three-link contractual chain consisting of an offshore company - the copyright holder, a transit company - the licensee (for example, in Cyprus or in another state that has a Double Taxation Avoidance Agreement with Russia) and a Russian company as a sublicensee.

Royalties are paid by the Russian company (sublicensee) to the Cypriot licensee, then by the Cypriot company - the offshore owner of the trademark right. The Cyprus company is used as an intermediate link, since payments from Russia in its favor are exempt from withholding tax due to the specified bilateral agreement. As a result, the intellectual property is used in Russia, and royalties are ultimately accumulated in an offshore zone.

In accordance with Article 309 of the Tax Code of the Russian Federation, income from the use of intellectual rights in Russia is subject to a 20 percent income tax. This tax is subject to withholding at the source of payment of income, that is, at the Russian company. At the same time, since we are talking about royalty payments in favor of a company located in a country with which Russia has a tax agreement (in our example, this is the Republic of Cyprus), royalty payments will not be subject to income tax in Russia (based on paragraph 1 of Article 12 Agreement of 1998 and subparagraph 4 of paragraph 2 of Article 310 of the Tax Code of the Russian Federation) and, accordingly, the Russian company as a tax agent will be exempt from the obligation to withhold tax at source. In Cyprus, the profit of a local company under a sublicense agreement is subject to tax at a rate of 10%, but the tax base is reduced by payments under the license agreement that are made to the holder of the exclusive rights to the intangible asset.

With regard to the legal, organizational and tax component of the Russian part of the scheme for structuring royalty payments, three points must be taken into account:

Sublicense agreement in accordance with clause 5 of Art. 13 of the Patent Law of the Russian Federation of September 23, 1992 N 3517-1 and (in the case of trademarks) in accordance with Art. 27 of the Law of the Russian Federation of September 23, 1992 N 3520-1 “On trademarks, service marks and appellations of origin of goods” is subject to registration with Rospatent and without registration is considered invalid. From January 1, 2008, these laws lose force due to the entry into force of the fourth part of the Civil Code, but there are no fundamental changes in relation to the rules for registering trademarks, inventions, utility models, etc.;

From January 1, 2006, the Russian company - the source of payment - is recognized as a tax agent on the amounts of royalties paid and must pay VAT. In accordance with paragraph 4 of Art. 148 of the Tax Code, the Russian Federation is recognized as the place of sale of works (services) if the buyer of works (services) carries out activities here. This provision also applies to the “transfer, grant of patents, licenses, trademarks, copyrights or other similar rights.” Until 2006, this paragraph of Art. 148 of the Tax Code sounded like this: “transfer of ownership or assignment of patents, licenses...”, i.e. VAT was levied only on the transfer of exclusive rights (ownership rights) to these intangible assets. VAT paid on royalties is deductible. And if a Russian company has a “reserve” for taxes to be paid, then in the case of using rights to intangible assets in activities subject to VAT, there will be no additional tax burden for it;

A non-resident is a recipient of royalties in accordance with clause 1 of Art. 312 of the Tax Code must provide the tax agent with confirmation that he has a permanent location in a state with which Russia has an agreement regulating tax issues. The confirmation must be certified by the competent authority of the relevant foreign state.

Despite the outward invulnerability of the scheme, the tax authorities, of course, could not calmly watch how companies, under the guise of all sorts of unnecessary (in the opinion of tax collectors) “rubbish,” “structured” multibillion-dollar payments to low-tax jurisdictions. Therefore, over the past few years there have been repeated attempts on their part to prevent this in one way or another. Currently, there are several factors identified by the tax authorities, the presence of which may deem a royalty payment scheme illegal:

A trademark (patent, secret formula, etc.) is not used in activities aimed at making a profit. The consequences are recognition of the costs of paying royalties under license agreements as economically unjustified. Following this logic, the taxpayer must confirm the actual use of the trademark (patent, rights to another intangible asset) in activities aimed at making a profit. And the structure of expenses incurred by type of activity, including license fees, must correspond to the structure of the company’s income. In other words, if a company produces children's sleds, then royalties for the use of the Marlboro trademark will be recognized by the court as economically unjustified;

The taxpayer created an illegal scheme to evade payment of income tax and VAT on the amounts of license fees paid under fictitious (void) agreements. The main “evasionist” resource of licensing fee schemes: register the rights to something unnecessary (or which in reality has a value much less than on paper), and then pay specific licensing fees for the use of this unnecessary thing. The cornerstone in proving the illegality of the scheme is the identification of the interdependence of the licensor and the licensee, proof by the tax authorities of intent to evade taxes, the absence of a business purpose in the actions of the taxpayer;

Errors in documenting royalty payments. A traditional mistake is the lack of confirmation of the permanent location of the licensor in a state with which Russia has an agreement on the avoidance of double taxation. In accordance with paragraph 1 of Art. 312 of the Tax Code, income tax is not withheld only if the foreign organization, before the date of payment of income, provided the tax agent with a confirmation certified by the competent authority of the relevant foreign states (for example, for Cyprus this is the local Ministry of Finance). Sometimes taxpayers mistakenly believe that a certificate of incorporation is sufficient to prove domicile.

How to avoid risks when paying royalties

In general, royalties are a good tax planning tool for manufacturing enterprises, media, IT and companies in other industries where the use of patents and trademarks has a clear economic justification. It is somewhat more difficult with the trade and services sectors. But in any case, tax risks arise only when this tool is used “head-on” or the amount of license fees exceeds all reasonable limits.

Actions that, in our opinion, need to be taken to ensure that license payments do not turn out to be a dangerous tax scheme:

Payments under the license agreement must be economically justified. Their connection with the company’s income must be traced; 5-7% of turnover - the amount of license fees for the use of trademarks, which usually corresponds to the market level. To confirm the production focus, the main document is, of course, the license agreement. It must clearly indicate for what period and for the production of what volume of products it is concluded. Good evidence of the reality of the relationship with the licensor will be the presence of pre-contractual correspondence with him, minutes of meetings and negotiations. The reality and connection of the licensing agreement with the sale can be confirmed by ordinary accounting and technological documents: invoices and delivery notes indicating the brand name of the product, production and technological maps, etc.

The licensee and licensor must not be interdependent. Tax authorities should not be able to determine that monies paid under a license agreement are reinvested in a Russian company. Compliance with this condition will not eliminate the risk of additional taxes under Art. 40 of the Tax Code in the event of concluding an agreement with a foreign company as part of a foreign trade transaction. But it will be more difficult for tax authorities to prove direct intent to evade taxes or obtain an unjustified tax benefit if non-exclusive rights to intellectual property or visualization tools were received from an unaffiliated person;

Compliance with the requirement to document licensing relationships. The license agreement must be registered with Rospatent in advance, before payments under it begin; the licensor must provide proof of his location with an apostille before the first payment of income to him; changes to the contract must also be registered. In accordance with paragraph 4 of Art. 310 of the Tax Code, the tax agent, at the same time as submitting a tax return for income tax, must provide information on the amounts of income paid to foreign organizations and taxes withheld for the past reporting (tax) period.

Practical royalty payment schemes

In international practice, it is very common to use foreign, primarily offshore, companies to own intellectual property (copyrights, patents, trademarks, etc.). The fact is that intellectual property is the most mobile type of property, easily transferable to a foreign owner. Therefore, the natural tendency is to move such property to those jurisdictions where its operation (that is, receiving royalties - license fees for granting the right to commercially use it) is associated with the least tax losses.

Since most offshore zones do not have tax treaties with developed countries, when royalties are paid to an offshore company in the country from which the income is paid, withholding tax is levied. In certain cases, tax payment can be avoided or its rate reduced if a company from a taxable country with which there is a tax treaty is used as a transit element in the scheme.

Payment of royalties to a company in Cyprus

According to the new Cyprus tax legislation, Cypriot companies can be resident (if they are managed from Cyprus) or non-resident (otherwise).

A non-resident company does not pay taxes on income received outside Cyprus, but is not subject to Cyprus tax treaties. Thus, when royalties are paid from the Russian Federation, they will be subject to withholding tax at a rate of 20%; in Cyprus, there is no tax. There is no withholding tax when distributing profits to a Cyprus company.

A resident company falls under the tax treaty of Cyprus with the Russian Federation, therefore no withholding tax is charged when paying royalties from the Russian Federation in this case. Royalties received by a resident Cyprus company are included in the taxable base, the tax rate is 10%.

It is possible to use a Cypriot resident company as a transit element. In this case, the owner of the patent (mark) is a foreign company. It is possible to use a company from any tax-free offshore jurisdiction (for example, the BVI) for these purposes. This company, under a licensing agreement, transfers to the Cypriot company the rights to issue sublicenses for the use of this patent (mark) in the Russian Federation. The Cypriot company receives royalties from the Russian Federation and pays royalties to the BVI.

There is no withholding tax in the Russian Federation due to a tax treaty. In Cyprus, the difference between royalties received and paid is taxed at a rate of 10%. The margin between royalties paid and received may be 1-3%, so the effective tax rate will be tenths of a percent. There is no withholding tax in Cyprus on outgoing royalties. There is no tax on income or on outgoing dividends in the BVI.

Payment of royalty to a company in the Netherlands

An alternative to Cyprus is the Netherlands. Due to the high income tax rate (34.5%), it is advisable to use a Dutch company only as a transit element. The owner of the patent (mark) is a foreign company. It is possible to use a company from any tax-free offshore jurisdiction (for example, the BVI) for these purposes. This company, under a licensing agreement, transfers to a Dutch company the rights to issue sublicenses for the use of this patent (mark) in the Russian Federation. The Dutch company receives royalties from the Russian Federation and pays royalties to the BVI.

There is no withholding tax in the Russian Federation due to a tax treaty. The Netherlands taxes the difference between royalties received and paid at a rate of 34.5% (this difference should generally be at least 7%, giving an effective rate of approximately 2.4%). There is no withholding tax on outgoing royalties in the Netherlands. There is no tax on income or on outgoing dividends in the BVI.

Switzerland has currently signed 91 double tax treaties. Agreements with Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Russia, Ukraine and Uzbekistan provide an opportunity to optimize the taxation of passive income of holding structures.

According to the agreement between Russia and Switzerland, royalties received by a resident Swiss company are included in the taxable base, the tax rate is only 5%. Therefore, many intellectual property owners register their companies in Switzerland.

Royalty accrual in Ireland

There are several schemes for optimizing license fees (royalties) in Ireland. The most famous is the “double Irish”. This scheme is very popular among American IT companies. In particular, it is used by Facebook, and representatives of Apple were among the first to use it.

First, Company A transfers the intellectual property rights to its Irish affiliate B1. In this case, the headquarters of company B1 should be located in a classic offshore with a zero tax rate. This could be the Seychelles, Bermuda, Cayman Islands, Nevis, Belize, etc.

As a result, company B1 has the opportunity not to pay royalty tax in Ireland, since, in accordance with Irish laws, the company is considered a resident of the state from which it is controlled. B1 then transfers the intellectual property rights to its Irish subsidiary B2. After which B2 conducts business activities, making a profit.

Subsequently, most of the profit for the use of intellectual rights is transferred to B1, which, as mentioned above, does not pay royalty tax at all, because operates offshore. The small portion of profits retained by B2 is subject to Irish corporation tax at a rate of 12.5 percent. In practice, there are cases when a company playing the role of B2 is completely unprofitable.

Sources and links

ru.wikipedia.org - Wikipedia – the free encyclopedia, WikiPedia

bank24.ru – website of the bank Bank24.ru

btimes.ru – Russian business news

mybank.ua – financial information portal

retailidea.ru - retail franchising website

5tm.ru - website of a patent attorney

grandars.ru - economist's encyclopedia

allfi.biz - information portal about investments and investment instruments

fransh.ru - website of the company FRANSH - consulting in the field of franchising

vocable.ru - national economic encyclopedia

franshisa.ru - website about franchising

psychomedia.org - informational and educational resource

klerk.ru - information portal about accounting, tax law

taxpravo.ru - Russian tax portal

taxgroup.ru - website of the consulting company Tax Group

geoglobus.ru - geological-geographical and techno-ecological review

m-economy.ru - problems of modern economics, scientific and analytical journal

roche-duffay.ru - website of Roche & Duffay - international tax planning

rbis.su - Russian Library of Intellectual Property

ocenchik.ru - website of the independent appraisal company Atlant Ocenka

gestion-law.com - website of the company "Gestion" - legal and accounting services

Quite simple: royalties are that part of the proceeds from the sale of a product that the author receives. Despite the simplicity of the formulation, the topic is quite extensive and, in connection with this, taxation and accounting of such transactions has a number of features. Let's try to deal with some of them.

Scope of application and some legal issues

The concept of royalty can be attributed to several legal areas. Thus, it is used as one of the forms of payment under a contract widely in the franchising sphere and denotes copyright and license payments for the commercial use of something belonging to another person (patent, work of art, etc.).

And finally, royalties in economics and land law (a term used in world practice) are rent payments for the right to develop natural resources paid by an entrepreneur to the owner of land or subsoil.

Based on clause 2 of Art. 1028 of the Civil Code of the Russian Federation, a commercial concession agreement is subject to the federal authority for intellectual property (Rospatent). According to the general rule of Art. 1031 of the Civil Code of the Russian Federation (which can be amended by agreement), a commercial concession agreement must be registered by the copyright holder (franchisor). If the registration requirement is not met, the contract is considered void (according to Article 1031, paragraph 2 of Article 1028, paragraphs 3,6 of Article 1232, paragraph 1 of Article 1490 of the Civil Code of the Russian Federation).

agreement on the alienation of the exclusive right to a work and the right to use the work under a license (Article 1285 of the Civil Code of the Russian Federation);
license agreement granting the right to use the work (Article 1286 of the Civil Code of the Russian Federation);
copyright agreement (Article 1288 of the Civil Code of the Russian Federation).

It is necessary to dwell separately on agreements with counterparties, because a question arises about the applicable law (Russian or foreign). According to paragraph Art. 1211 of the Civil Code of the Russian Federation, by default, the law of the country with which the contract is most closely related is applied to the contract. The relations of the parties under the license agreement are governed by the law of the state where the licensor is located. At the same time Art. 1210 of the Civil Code of the Russian Federation allows the parties to an agreement to choose the law that is subject to application to their rights and obligations under this agreement. When applying Russian law, relations automatically fall under the regulation of Part 4 of the Civil Code of the Russian Federation.

Tax aspects

Income tax

Expenses in the form of royalties are recognized in the period to which it relates, on the date in accordance with the conditions or on the date of presentation to the user of documents serving as the basis for making calculations, or on the last day of the reporting (tax) period (clause 3, clause 7, art. 272 of the Tax Code of the Russian Federation).

For profit tax purposes, income from the granting of rights to the results of intellectual activity for use, in accordance with clause 5 of Art. 250 of the Tax Code of the Russian Federation, relate to non-operating income, if they are not determined by the taxpayer in accordance with the procedure, Art. 249 of the Tax Code of the Russian Federation, as income from the sale of property rights. Thus, if for the copyright holder this type of activity is one of the main types of activity, then income is recognized in accordance with Art. 249 of the Tax Code of the Russian Federation, and if not, then in accordance with Art. 250 Tax Code of the Russian Federation.

In clause 3, clause 4 of Art. 271 of the Tax Code of the Russian Federation determines that for non-operating income in the form of royalties, the date of receipt of income is recognized as the date of settlements in accordance with the terms of concluded agreements, the date of presentation to the taxpayer of documents serving as the basis for making settlements, or the last day of the reporting (tax) period.

Important:

International aspect

One of the most common tax planning schemes is the transfer of intellectual property rights to an offshore company for the purpose of accumulating royalties in a tax-free jurisdiction.

UNCTAD estimates the global offshore industry to be worth US$12 trillion (http://www.unctad.org). Russian organizations cannot do without the use of offshore business. The use of offshore jurisdictions by Russian organizations affects not only their internal interests, but also the interests of Russia as a whole. Evasion reduces the public sector of the country's economy, and companies that evade paying taxes through such schemes may find themselves in a worse position than law-abiding taxpayers.

Accounting

In organizations whose subject of activity is the provision for a fee of rights arising from patents for inventions, industrial designs and other types of intellectual property, revenue is considered to be receipts the receipt of which is associated with this activity. Thus, remuneration should be included in income from ordinary activities in the reporting period in which they were accrued under the terms of the agreement (clauses 12 and 15 of PBU 9/99).

The organization's expenses for paying royalties related to its core activities are recognized as expenses for ordinary activities in accordance with clause 5 of PBU 10/99, approved by Order No. 33n dated 05/06/1999.

Example

In October 2011, Alpha LLC transferred to the Company the right to use a set of exclusive rights to intellectual property (this service is the main activity). Monthly payments are set in a fixed amount in euros and are subject to receipt on the terms of 100% prepayment in rubles at the official rate on the day of payment. The monthly payment under the contract is set at 118 euros (including VAT) and is due no later than the 15th day of the month preceding the billing month. The euro exchange rate set by the Bank of Russia as of October 15, 2011 is 41.6638 rubles/euro.

Dt 51 “Settlement accounts” Kt 76-5 “Settlements with other debtors and creditors”

RUB 4,916 (118 euros* 41, 6638) - Advance payment received from
user for November

D-t 76-VAT K-t 68-2 “Calculations for VAT” 750 rub. (RUB 4,916 x 18/118) - VAT is calculated on the prepayment received

D-t 76-5 K-t 90.1 “Sales” 4,916 rub. (118 euros* 41, 6638) - Income for
november

Dt 90-3 “Value added tax” Kt 68.2 750 rub. (RUB 4,916 x 18/118) - VAT calculated on income

D-t 68-2 K-t 76-VAT 750 rub. - Accepted for deduction of VAT calculated from the prepayment amount for November

Publication

In practice, companies that use or provide for use any types of intellectual property, for example, patents, computer programs or trademarks, face royalties. The use of the exclusive right occurs within the framework of a license agreement for a fee - royalties, periodic fixed or percentage payments to the copyright holder.

The parties to the license agreement are the licensor and the licensee (clause 1 of article 1233 of the Civil Code of the Russian Federation).

licensor - the one who grants the other party (licensee) the right to use intellectual property (non-exclusive right) (Articles 1235, 1243 of the Civil Code of the Russian Federation);
licensee - pays for and accepts intellectual property for use. In other words, it receives non-exclusive rights to it within the framework of the concluded agreement (Article 1235 of the Civil Code of the Russian Federation).

7 Required Components of a License Agreement

Licensor and licensee data.
Subject of the agreement: description of the transferred intellectual property object and a list of actions that the licensee has the right to perform with it.
Type of license agreement (exclusive or non-exclusive license).
The territory in which the transferred right can be used. If the territory is not specified, then it is understood as the Russian Federation.
The period for which the contract is concluded.
Conditions, payment procedure and amount of remuneration of the licensor or gratuitousness of the transaction.
Conditions, terms and procedure for the licensee to report on the use of intellectual property. If such a report is not required, this must be mentioned in the contract;

Accounting with the licensor

Z3 Accounting. The intangible asset transferred under the license agreement continues to be listed on the licensor’s balance sheet (clause 38 of PBU 14/2007). It is accounted for in a separate subaccount. For example, to account 04 “Intangible assets” a subaccount “Intangible assets transferred for use under a license agreement” is opened. In this case, the following wiring is done:

Dt 04 subaccount “Intangible assets transferred for use under a license agreement” Kt 04 subaccount “Intangible assets without encumbrance” - non-exclusive rights to an intangible asset have been transferred.

Depreciation

Having transferred an intangible asset for use, depreciation continues to be charged on it, and it is calculated in the general manner (clause 38 of PBU 14/2007).

If the transfer of non-exclusive rights to intellectual property is the subject of the company’s activities, then the amounts of accrued depreciation are taken into account as expenses for ordinary activities (clause 5 of PBU 10/99). The wiring will look like this:

Dt 20 (44...) Kt 05 subaccount “Depreciation of intangible assets transferred for use” - reflects the amount of accrued depreciation on an intangible asset transferred for use.

When the transfer of non-exclusive rights to intellectual property is not a separate type of activity of the organization, then depreciation amounts must be taken into account as part of other expenses (clause 11 of PBU 10/99, approved by order of the Ministry of Finance of Russia dated May 6, 1999 No. 33n). The operation is reflected with the following entry:
Dt 91-2 Kt 05 subaccount “Depreciation of intangible assets transferred for use” - reflects the amount of accrued depreciation on an intangible asset transferred for use.
Revenue

The transfer of intellectual property for use usually entails the receipt of income by the licensor. If leasing intellectual property is one of the company’s activities, then royalties are recognized as revenue (clause 5 of PBU 9/99). This is reflected in accounting as follows:

Dt 62 (76) Kt 90-1 – royalties accrued.

If the transfer for use is not the subject of the company’s activities, then the income received must be included in other income. The accounting entry would be:

Dt 62 (76) Kt 91-1 – royalties accrued.

Example 1

Ferma LLC acquired the right to use this selection achievement from Zootekhnika for one year. According to the agreement, “Farm” undertakes to pay monthly remuneration to “Zootechnika” in the amount of 3,540 rubles. (including VAT - 540 rubles).

Since the subject of activity of Zootekhnika LLC is the provision of selection achievements belonging to it for temporary use, the income from the transaction is recognized as revenue. Thus, when transferring an object of intellectual property, the Zootekhnika accountant made the following entry:

Dt 04 subaccount “Intangible assets transferred for use” Kt 04 subaccount “Intangible assets located in the organization” - 150,000 rubles.

The accountant also continues to calculate depreciation, making a monthly entry:

Dt 20 Kt 05 “Amortization of intangible assets transferred for use” – 2500 rub.

The accountant then writes off these expenses to the cost of sales:

Dt 90-2 Kt 20 – 2500 rub.

The accountant considers license fees as revenue:

Dt 62 “Settlements with buyers and customers” Kt 90-1 – 3540 rub.

VAT is charged on the amount of revenue:

Dt 90-3 Kt 68 – 540 rub.

When payments are received from Ferma LLC, the accountant makes an entry:

Dt 51 Kt 62 – 3540 rub.

Upon termination of the contract, the accountant will make the following entry:

Dt 04 subaccount “Intangible assets located in the organization” Kt 04 subaccount “Intangible assets transferred for use” - 150,000 rubles.

Taxation

Income from the transfer of non-exclusive rights under a license agreement is non-sales income if it does not relate to sales income (clause 5 of Article 250 of the Tax Code of the Russian Federation). In practice this means the following. If the licensor enters into licensing agreements on a systematic basis, then income should be recognized as part of sales revenue. This conclusion can be made based on an analysis of the provisions of tax and civil legislation (subclause 1, clause 1, article 265 of the Tax Code of the Russian Federation, article 606, clause 1, article 1235 of the Civil Code of the Russian Federation).

Just an FYI

Systematicity means two or more times during a calendar year (clause 3 of Article 120 of the Tax Code of the Russian Federation).

Depending on the type of intellectual property transferred, the licensor's remuneration may be subject to VAT (subclause 1, clause 1, article 146 of the Tax Code of the Russian Federation). The fact is that the transfer of certain types of intangible assets for use is exempt from VAT. Such assets include (clause 26 of article 149 of the Tax Code of the Russian Federation):

inventions;
utility models;
industrial designs;
computer programs;
Database;
topologies of integrated circuits;
know-how.

However, the mere fact that an intangible asset is on the preferential list for VAT exemption is not enough. You will also need a correctly executed license agreement between the licensor and the licensee (letters from the Ministry of Finance of Russia dated May 19, 2009 No. 03-07-07/45, dated January 12, 2009 No. 03-07-05/01).

Just keep in mind

Even if the licensor’s income is not subject to VAT, the licensor is obliged to issue an invoice to the licensee for the amount of license payments (clause 3 of Article 169 of the Tax Code of the Russian Federation). You need to make a note in it “Without tax (VAT)” (clause 5 of Article 168 of the Tax Code of the Russian Federation).

Accounting with the licensee

Accounting

Intangible assets received for use are taken into account off the balance sheet (clause 39 of PBU 14/2007). An account for this is not provided for in the standard chart of accounts; the company enters it independently. For example, account 012 “Intangible assets obtained on the basis of a license agreement.” We add that the received object is accounted for as a debit to account 012 in the amount of license payments for the entire term of the agreement (clause 39 of PBU 14/2007). This is reflected in accounting as follows:

Expenses for payment of royalties by the licensee are related to expenses for ordinary activities (clause 5 of PBU 10/99). They are included in the expenses of the current period and are reflected in accounting as follows:

Dt (20, 44...) Kt 60 (76) – periodic license payments are taken into account.

Example 2

As initial data, let’s take the condition of Example 1 and consider the accounting at Ferma LLC.

When receiving an intangible asset for use, the accountant will record:

Dt 012 “Intangible assets obtained on the basis of a license agreement” – RUB 36,000. (3000 rubles × 12 months).

The accountant will record the following monthly expenses for license fees:

Dt 26 “General expenses” Kt 76 – 3000 rub.

It will also take into account “input” VAT:

Dt 19 Kt 76 – 540 rub.

Royalty payments will be accounted for as follows:

Dt 76 Kt 51 – 3540 rub.

Upon expiration of the contract, the accountant will write off the value of the intangible asset received for use:

Kt 012 “Intangible assets obtained on the basis of a license agreement” – 36,000 rubles.

Taxation

License payments can be taken into account when calculating income tax as part of other expenses associated with production and (or) sales (subclauses 26, 37 and 49, clause 1, article 264 of the Tax Code of the Russian Federation). The main condition is compliance with Art. 252 of the Tax Code of the Russian Federation on documentary evidence and economic justification of costs.

The licensee can deduct “input” VAT on license payments at a time. Naturally, if the conditions mandatory for receiving a deduction are met (clause 1 of Article 172 of the Tax Code of the Russian Federation).

If the licensor is an individual, personal income tax must be withheld from the royalty amount. The duties of a tax agent are performed by the licensee (Article 209, paragraph 1 of Article 210 of the Tax Code of the Russian Federation). An exception is payments to the heirs of the author of an invention, utility model and industrial design. Such persons independently pay personal income tax (subclause 6, clause 1, article 228 of the Tax Code of the Russian Federation).

If expenses cannot be documented, you need to use cost standards. They are set as a percentage of income received separately for various types of intellectual activity. The range of standards ranges from 20 (scientific developments) to 40 percent (creation of sculptural works). A complete list of types of intellectual activity and the standards applied to them is in Art. 221 Tax Code of the Russian Federation.

Azgaldov G. G., professor;
Karpova N. N., professor

When using the income approach when valuing certain types of property, the category of “royalties” is widely used. At the same time, appraisers often face two main difficulties associated with operating with this concept:
- not entirely correct understanding of the essence of this category;
- ignorance of the methods by which it is possible to clarify the numerical values of royalties (in comparison with the rougher, averaged values given in the reference tables).
The purpose of this article is to provide in-depth information about royalties (and other types of remuneration for intellectual property licensed) so that information on this issue, at the current level of knowledge, for readers of the magazine can be considered largely exhausted. Moreover, the main attention will be paid to compensation payments for those intangible assets that are intellectual property.
In world practice, remuneration for the use of IP is carried out under a license (from the Latin “licentia” - permission, right) in one of three main forms, which have the following names.
When the amount of remuneration to the IP copyright holder (licensor) from the results of use of the IP by the recipient (licensee):
==> completely depends - the reward is called royalty;
==> completely independent - the remuneration is called a lump sum payment;
==> partly depends - the remuneration is called combined (royalty + lump-sum payment).
The form of remuneration is specified in the license agreement (between the licensor and the licensee). In the following, these 3 types of remuneration are considered in descending order of the relative frequency of their use in practice.

FORM OF REWARD IN THE FORM OF ROYALTY

ORIGIN AND MEANING OF THE TERM

The term "royalty" comes from the English (and French) term royal - royal, from which the term royalty is derived - a fee levied by the royal power in England for granting its subject the right to land ownership or development of subsoil. In the latter case, it could act as a rent for subsoil development. The term began to be widely used in the 16th century, when an industrialist who received the right to develop coal mines from the king had to annually deduct part of the profits to the crown - royalties (royal share).
Currently, in relation to intangible assets and, in particular, to intellectual property, royalty most often means a periodically agreed upon in a license agreement payment by the licensee (buyer, transferee) to the licensor (seller, copyright holder) of monetary amounts in amounts depending on the results obtained when using IP by a licensee.
The term "royalty" is also used for:
- designation of payment for the right to develop subsoil;
- rent;
- duties;
- fees for a license of some kind;
- a share of a product or profit reserved for himself by the owner of some property for granting the right to use this property to another person.
The lack of consideration of the importance of royalties can be illustrated by the following famous example. Dan Bricklin invented the paper puller for personal computers in the late 70s. But he did not patent the corresponding technology and, naturally, did not receive any royalties from many companies that used his invention. As a result, he lost potentially several hundred million dollars.
Royalties are used for settlements with the licensor in 80 - 90% of cases when licensing agreements are concluded.

STANDARD ROYALTY RATES
Royalties are usually represented by a rate P (in foreign literature the letter R is usually used), expressed as a percentage of the base - the effect (result) of the licensee (buyer). The following can be used as a base:
- gross income (effective gross income, sales amount, sales volume);
- net income;
- additional profit (arising from the enterprise that purchased and uses the IP);
- price of a unit (batch) of products;
- cost;
- unit capacity of the workshop (production);
- cost of the main processed raw materials, etc.
Most often, such a base is taken as the price of a unit of production or the amount of sales (effective gross income - EIG). Experience shows that with such a basis, there is the smallest number of conflicts regarding the payment of license fees between the parties to a licensing transaction. The fact is that the initial data necessary to calculate the amount of royalty payments in this case can be easily found in the licensee’s accounting documents.
Table 1 shows standard (approximate) royalty rates used by specialized large foreign trade organizations in relation to such a base based on an analysis of global practice in concluding licensing transactions in various industries. This table allows you to pre-determine the approximate royalty rate for each specific property.

Table 1

EXTENDED LIST OF STANDARD ROYALTY RATES - AS A % OF THE UNIT PRICE OR OF SALES AMOUNT (SALES VOLUME)

	Objects of application of royalty rates	Royalty R in %
INDUSTRIES:
	Aviation
	Automotive
	Instrumental
	Metallurgical
	Consumer durables
	Consumer goods of mass demand with a short shelf life
	Agricultural Engineering
	Machine tool industry
	Construction mechanical engineering
	Textile
	Pharmaceutical
	Chemical
	Chemical Engineering
	Electronic
	Electrotechnical
EQUIPMENT FOR:
	railways
	office work
	boiler rooms
	foundry
	medicine
	metalworking
	metallurgical industry
	surface treatment
	general industrial purposes
	water purification
	Food Industry
	handling equipment
	printing
	radio communications
	aircraft manufacturing
	welding work

	alarm
	special purposes
	vessels (river and sea)
	textile industry
	transport
	chemical industry
	general purpose refrigeration units
	refrigeration units for industry
	cement factories
	electronic devices
	electrical engineering
SPECIFIC TYPES OF PRODUCTS:
	Aviation technology
	Car engines and spare parts for them
	Auto parts
	Cars
	Batteries
	Aromatics




	Bicycles

	Air conditioners
	Armament

	Rubber products
	Plastic products
	Glass products
	Measuring instruments
	Tool




	Compressors
	Copy paper
	Livestock feed
	Boiler equipment

	Dyes



	Wooden furniture
	Metal furniture
	Medical devices
	Metal constructions
	Mineral oils
	Industrial motors
	Heating systems





	Equipment
	Perfumery
	Printed publications


	Records
	Semiconductors
	Semi-finished products

	Foodstuffs
	Organic chemical products
	Radio tubes
	Relay equipment
	Hand tool
	Aircraft
	Agricultural machines
	Hardware
	Sporting goods
	Metalworking machines
	Construction machines
	Construction materials

	Textile fibers
	TV equipment
	Fabrics for tailoring
	Fabrics for industrial purposes
	Products for the film industry
	Knitwear
	Fertilizers
	Paper and cardboard packaging
	Pharmaceutical products
	Photo products
	Chemicals for agriculture
	Chemicals
	Electrical instrumentation
	Electrical cables
	Electronic computers

It is advisable to clarify the approximate royalty rate P (taken from Table 1) taking into account the following factors that influence its value in the specific conditions of a transaction with intellectual property (IP).

FACTORS REFLECTING THE LEGAL ASPECTS OF THE TRANSACTION
1. Scope of transferred rights. The highest royalty rates will be for full licenses - that is, when the licensee receives the exclusive right to use the IP. Somewhat lower (but also quite high) royalty rates occur with exclusive licenses (when the licensor retains the right to use the IP). The lowest royalty rates occur in the case of non-exclusive (simple) licenses, since in this case mutual competition and competition between other licensees is not excluded.
2. Territory of the license agreement. The royalty rate depends monotonically on the size of the territory.
3. Scope of legal protection. Royalties are higher for a patent license than for a non-patent license.

FACTORS REFLECTING THE COMMITMENTAL ASPECTS OF THE TRANSACTION

4. Terms of the license agreement on the mutual exchange of improvements. The royalty rate usually depends monotonically on the volume of interchange of improvements (both enforced and unenforceable).
5. Dependence of the licensee on the licensor. This refers to the dependence in raw materials, materials, equipment, parts and components necessary to organize production using the transferred technology. The greater the dependence, the higher the royalty rate.
6. Availability of competitive offers. This refers to competitive offers for the sale of technologies comparable in economic efficiency to the purchased one. If there is competition, the royalty rate will decrease.

FACTORS REFLECTING THE ECONOMIC ASPECTS OF THE TRANSACTION

7. Amount of required capital investment. They are necessary to organize production of products under license. The larger the investment, the lower the royalty rate.
8. The volume of transferred technical documentation. With the full volume of transferred technical documentation (design, technological and operational), the royalty rate will be higher than with an incomplete volume (for example, only design documentation).
9. Estimated costs of the licensee for its own alternative R&D. These R&D activities are aimed at developing IP that is comparable in economic efficiency to the purchased one. The lower these opportunity costs, the lower the value of the IP and, accordingly, the lower the royalty rate.
10. The licensee’s technological capabilities to make a profit from the intellectual property. These possibilities depend on the degree of technological development of the subject of the license. That is, the subject of the license can be an idea, a technical solution, semi-industrial or industrial use. The lowest royalty rate is in cases where the subject of the license is an idea, the highest is for industrial use.
11. The reputational ability of the licensee to profit from the IP. If the licensor has good goodwill and (or) a trademark and the licensee can directly or indirectly use this information when advertising licensed products, then the royalty rate in this case may be increased.
12. Volume of licensed products produced by the licensee. In connection with the goals pursued by the licensor, the dependence of the royalty rate on the volume of product output can be direct and inverse. Often this relationship is direct (“more output - higher royalty rate”).
13. Share (DS) of the transferred IP in the creation of income (D) for the licensee. The greater the share of income in the licensee's total income that comes from the transferred IP, the higher the royalty rate.
Unfortunately, there is still no data in the literature on the quantitative dependence of the royalty rate on most of these factors. And for those factors for which such an influence is known and depends on the specifics of different types of IP, the relevant information is given below.

SELECTION OF ROYALTY RATES FOR INDUSTRIAL PROPERTIES The absence of a patent, as a rule, reduces the royalty rate by 10 - 30% compared to a similar object transferred under a patent license.
Based on the fact that the cost of design documentation usually amounts to up to 30% of the cost of the entire package of technical documentation, when transferring only design documentation under a license agreement, it is advisable to reduce the royalty amount to 30% of the standard (tabular) rates.
The standard royalty rates P shown in Table 1 usually apply to types of industrial property such as inventions.

SELECTION OF ROYALTY RATES FOR KNOW-HOW OBJECTS If the license is for the transfer of know-how, the P value is usually reduced by 20 - 60% (compared to the table), depending on a number of factors. For example, it decreases by:
- 20-40% if the intellectual property is transferred under a simple (non-exclusive) license;
- 20-40%, if the development of intellectual property requires significant capital investments (for example, for additional research);
- 40-60%, if the know-how is transferred to IP, known on the market, but still of interest to the licensee;
- 70-80%, if not the entire package of technical documentation is transferred, but only design documentation,

SELECTION OF ROYALTY RATES FOR INDUSTRIAL PROPERTIES AND KNOW-HOW There is a tendency to increase the importance of OIP in the creation of new technologies, products, services, and therefore in practice there are increasingly cases where the P rate is taken equal to 20% and even 50% of the additional profit (or NPV - adjusted net income), the source of which is an assessed knowledge-intensive OIS.
When evaluating IP for licensing purposes, the guidelines for adjusting royalty rates in Table 1 can be used. These guidelines are summarized in Table 2.

table 2

RECOMMENDED ADJUSTMENT FACTORS TO STANDARD ROYALTY RATES

Degree of technology value	License				Unlicensed know-how
	Exceptional		Non-exclusive
	patent	non-patent	patent	non-patent
Particularly valuable	1,4 - 1,8	1,1 - 1,5	0,9 - 1,1	0,7 - 0,9	1,0 - 1,2
Average value	1,1 - 1,5	0,9 - 1,1	0,7 - 0,9	0,5 - 0,7	0,5 - 1,0
Low value	0,7 - 0,9	0,5 - 0,7	0,4 - 0,5	0,2 - 0,4	0,1-0,5

The standard royalty rates shown in Table 1 are N.V. Lynnik (Intellectual Property, 1989, No. 11) recommends using for a turnover not exceeding 1.5 million dollars. With a total turnover of 1.5 to 2.5 million dollars, it is advisable to reduce the royalty rates indicated in the table by 10%; with a turnover of 2.5 to 5 million dollars, a 20% reduction can be accepted, etc.
For example, with a turnover of $5 million, the royalty rate is determined as follows: the first $1.5 million - no reduction compared to the rate indicated in the table; for exceeding 1.5 million dollars to 2.5 million dollars - the rate is reduced by 10°/o; for more than 2.5 million dollars - the rate is reduced by 20%.
That is, if the tabulated royalty rate in this case is determined to be 3%, then the adjusted royalty payments will be equal in dollars:

0.03 x $1.5 million + 0.027 x $1 million + 0.024 x $2.5 million = $132,000

Other, more radical amendments are proposed in the brochure by I. S. Mukhamedshin “How to more effectively protect, sell or buy scientific and technical products.” M.: 1993 The following adjustment factors are proposed for the tabulated standard royalty rates, taking into account the cost of net sales:

R. Khametov (Intellectual Property, 1997, No. 3-4) describes the features of remuneration to the author (copyright holder) in the form of royalties, in relation to objects of copyright (in particular, literary works). And although he does not quantify (does not express quantitatively) these features, it seems useful to give a brief description of them. He identifies the following main modern forms of royalty.
1) System of linear current payments. According to it, the author receives a certain percentage of the entire turnover, the proceeds of the copyright recipient (licensee), without any changes, depending on how many copies the copyright recipient (licensee) sells. This system is very simple and understandable; it is quite often used in practice.
2) Degressive reward system. According to it, the author receives a certain percentage, which decreases with an increase in sales of copies of the work or with an increase in the income of the recipient. For example, when selling for the first 100 thousand copies. - 10% remuneration, for the next 100 thousand - 9%, etc. When interest rates are calculated correctly, this system satisfies the interests of both the author and the recipient. It is used quite often in Western countries.
3) Progressive reward system. As sales volume increases, the rate of remuneration paid to the author increases. This system may hinder the promotion of sales of the work by copyright recipients. However, if demand for a work grows, such a system may be acceptable to both authors and copyright recipients (licensees).
4) Profit-based system. The basis for calculating the author's remuneration is profit from the sale of copies of the work, and not gross income. This system is often found in copyright agreements concluded by Russian authors. For them, such a condition is extremely unfavorable, since doubts often arise about the correctness of the calculations made by the recipient (licensee). And there may be intractable disputes over the amount of remuneration.
5) A system that minimizes the time to receive rewards. This form is often used if the author (copyright holder) intends to speed up the sale of copies of the work. In this case, the copyright recipient (licensee) provides the author with a lower amount of payments for a certain limited period. This form is used when intensifying the sale of a product that brings high profits, or when targeting a product to identify buyer groups and distribution channels. The disadvantage of this form is that beneficiaries seek to extend the validity of discounts by any means.
6) System of guaranteeing a minimum royalty amount. Recently, the practice of stipulating in the copyright agreement the obligation of the copyright recipient to guarantee a minimum royalty amount has become widespread, which encourages the copyright recipient (licensee) to intensify the sale of copies of the work.
7) A system for guaranteeing the sale price of a copy of a work. A system that fixes the minimum selling price of a copy of a work, from which royalties will be calculated, has a similar goal to the system of a guaranteed minimum royalty. The fact is that the recipient (licensee) may be able to sell legal copies of the work at reduced prices to subsidiaries of the licensee. This makes it possible to hide significant amounts of income from sales from the author (copyright holder). In this regard, it is considered appropriate to include in the copyright agreement a condition determining the size of the sale price of copies of the work, from which the royalty is calculated.

SEQUENCE OF ACTIONS IN DETERMINING THE ROYALTY RATE

Recommendations for determining the amount of royalties based on standard (tabular) rates were outlined above. However, this is only a special case. And the general case involves carrying out some other actions. Especially when it comes to concluding a licensing agreement for the transfer of IP. Their description (most fully given in the brochure by I. S. Mukhamedshin “How to more effectively protect, sell or buy scientific and technical products” - M.: 1993 and in the article by N. Lynnik and A. Kukushkin, IS, 1993, No. 9-10) is briefly given below in relation specifically to the case of concluding a license agreement.
As for determining the royalty rate by the appraiser in relation to the general case, here he will have to mentally act alternately as a licensor, then as a licensee. Of course, this requires much more labor and time for the appraiser and can only be justified by the special importance and value of the assessed intellectual property object (IPR).
The algorithm for the general case of determining the royalty rate is as follows.

1. DETERMINING AN ACCEPTABLE RANGE OF POSSIBLE RATES

1.1. Considering royalties as the minimum acceptable remuneration for the licensor

Fair (often referred to as reasonable) royalty rates should, at a minimum, firstly, cover the licensor's costs associated with preparing an IP transfer agreement. If the licensor, according to the agreement, must provide the licensee with additional technical information or assistance (further research work at the licensee’s request, training of the licensee’s specialists, participation in the launch of the licensed object, etc.), then the licensor must include these costs in the minimum remuneration.
Secondly, the royalty rate must compensate for the profits lost as a result of the entry of a new competitor into the market in the person of the licensee.
Third, R&D expenditures may be taken into account (albeit controversially). The ambiguity is caused by the following circumstance. If the object of the license agreement has already been mastered in the production of the licensor, then he has the opportunity to reimburse R&D costs through the sale of products manufactured under the license. And the fact that the licensor has mastered the subject of the license increases the value of the license for the buyer, since it reduces its risk and must be taken into account at the second stage of agreeing on the royalty rate. In this case, it is logical not to include R&D costs when determining the amount of the minimum remuneration for the licensor.
If the object of the license agreement has not been mastered by the licensor, then it is advisable to take into account R&D costs when determining the amount of the licensor’s minimum remuneration. When selling a license to several licensees, it is necessary to distribute these costs between buyers in proportion, for example, to the volume of production under the license.
And finally, fourthly, the royalty rate must take into account at least the minimum compensation for transferring the IP to the licensee.

1.2. Consideration of royalties as the most acceptable alternative for the licensee.

The maximum royalty that a licensee can accept is equal to the cost of the best alternative that it could choose to purchase a license.
Such alternative solutions could be:
- carrying out own research and development work in this area;
- acquisition under license of comparable (similar) technology from another source;
- refraining from working with the licensor’s technology;
- free use of the licensor’s technology (albeit associated with the risk of prosecution and subsequent financial sanctions).
Identifying these alternatives gives the licensee a good idea of the practical value of the subject matter of the license.
If the licensee finds that few alternative solutions are available at relatively low cost, it will consider the licensor's proposed subject matter to be of limited value and will not accept high royalty rates. Conversely, if the subject of the license is protected by a strong patent (block of patents) covering an important area of knowledge, it makes sense for him to agree to higher royalties.
The methods described above make it possible to determine extreme (extreme) values of royalty rates: method 1.1 - the minimum acceptable for the licensor; method 1.2. - the maximum acceptable for the licensee. In contrast, the two methods outlined below make it possible to determine intermediate (from extreme) values of royalty rates.

2. DETERMINATION OF INTERMEDIATE VALUES OF ROYALTY RATES

2.1. Determination of royalty rates by analogy with previously applied rates

In domestic practice, for many enterprises and organizations, for the sake of efficiency, acceptable methods for determining the royalty rate may be:
- a method based on the use of standard royalty rates (discussed above),
- a method based on the analysis of analogues taken in relation to licensing transactions previously concluded by the licensor,
- a method based on the application of royalty rates taken from previously concluded licensing agreements for similar products for a given industry.
Thus, method 1.1 will make it possible to reach the minimum royalty rates that the licensor can agree to, and method 1.2 will determine the maximum royalty rates that the licensee could agree to. The values obtained from methods 2.1 and 2.2 (see below) make it possible to determine intermediate royalty rates. By using a combination of these four methods that is appropriate for a given situation, contracting parties can effectively determine the range of possible royalty rates and focus their attention on them during negotiations.

2.2. Determining the royalty rate using calculation methods that take into account the economic effect received by the licensee from using the IP The royalty rate can be calculated using the following main accounting based methods:
- the amount of additional profit of the licensee;
- the licensor’s share in the licensee’s gross profit
- profitability of production by the licensee.
The methods classified in group 2.2 due to their importance will be discussed in detail later.

3. AGREEMENT OF ROYALTY RATES OBTAINED BY DIFFERENT METHODS

Such approval is carried out by agreement of the parties involved in the licensing transaction, taking into account the royalty rates determined by methods 1.1; 1.2; 2.1; 2.2.
If we are not talking about concluding a license agreement, but about evaluating IP using the income method, then the approval is carried out by the appraiser himself. In this case, it is advisable for him to use a technology similar to that which is recommended to be used when reconciling IP estimates obtained by three different approaches - cost, market, income (see, for example, article by G. G. Azgaldov “The problem of reconciling estimates and its possible solution” /Evaluation Issues, 1999, No. 4).

DETERMINATION OF ROYALTY RATES BY CALCULATION METHODS
METHOD FOR CALCULATING THE AMOUNT OF ADDITIONAL PROFIT OF THE LICENSEE (THE "CRIMINAL ROYALTY" METHOD)

This method is most fully described in the book: Mukhamedshin I. S. “How to more effectively protect, sell or buy scientific and technical products.” M.: 1993. The material below is mainly based on this work.
Advantages of the method. High accuracy of calculation results.
Disadvantages of the method. Sufficiently accurate and reliable data is required on:
- performance indicators of the licensed enterprise;
- performance indicators of enterprises taken as a basis for comparison;
- market conditions for licensed products;
- technology market in the relevant field of production.
Scope of application of the method. Applicable only in cases where the economic effect of introducing a license or know-how is expressed in additional profit for the licensee.
The royalty rate P is determined by the formula:

Р = Dлр Рп (1)

where: P - royalty rate as a percentage of net sales,
Dlr - the licensor’s share of the licensee’s additional profit agreed upon by the partners under the licensing agreement,
Рп - marginal royalty rate i.e. the royalty rate due to the licensor, provided that all additional profits from the licensee's DP go to the licensor. Calculated by the formula:

Рп = DПсд/Сп *100, (2)

where: DPsd is the average annual additional profit of the licensee from the implementation of the license for the period of royalty payment (usually in hard currency), calculated using formulas (3)-(7);
Sp - the average annual cost of sales of licensed products for the period of royalty payment; determined from accounting documents.
The royalty rate R is calculated in three stages.
STEP 1. The additional profit of the licensee DP and the marginal royalty rate Рп are calculated (using the methods outlined below).
STAGE 2. Possible deviations of the values of additional profit DП and the marginal royalty rate Рп from the calculated values are taken into account.
STAGE 3. The licensor's share in the licensee's additional profit is calculated and the estimated royalty rate R is finally determined.
The sequence of actions in all these three stages is discussed below.

STAGE 1

Calculation of the values of additional profit DP and the marginal royalty rate RP is carried out using one of the methods indicated below by the letters “a”, “b”, “c”. These methods are:
a) Method for determining DPezbur - savings on current and capital costs without taking into account the distribution of costs and income over time (the letter “a” will be added to the numbers of the calculation formulas);
b) Method for determining DPazur - savings in current and capital costs, taking into account the distribution of costs and income over time (the letter “b” will be added to the numbers of the calculation formulas);
c) Method for determining DPvts - the amount of additional profit from a higher price for licensed products in comparison with the base one (the letter “c” will be added to the numbers of the calculation formulas).

METHOD "a" (distribution of costs and income - not taken into account)

This method is used when selling individual and related licenses, as well as unlicensed know-how if:
- the additional profit of the licensee DPezbur is caused by savings on the costs of producing licensed products (but compared with industry average costs);
- the distribution of cash flows (CFT) by year for the licensee’s enterprise does not affect the amount of additional profit of the licensee DPezbur, due to the fact that:
- it coincides with the industry average distribution of PDS or
- there is no data on such distribution.
The term comparison base is introduced - an enterprise whose production and economic indicators simultaneously have the following characteristics:
- manufactured products are similar to licensed ones;
- the capacity is close to the capacity of the licensee’s enterprise;
- it uses the usual, most common technology.
In this case, all indicators used are taken per unit of capacity of the licensee’s enterprise or per unit of output. If there is no data on the activity of the enterprise, you can use the corresponding industry average data.
Then the calculation of additional profit and the marginal royalty rate (without taking into account the distribution of cash flows) is made using the formulas:

DPezbur = DTZbur + DKZbur, (3-a)

DPbur = DPezbur * 100 / Ssn, (4-a)

where: DPezbur is the average annual additional profit of the licensee from the implementation of the license (due to savings in current and capital costs) without taking into account the distribution of costs and income over time;
DTZbur - the average annual value of the licensee's savings on current costs compared with the current costs of the base enterprise during the period of royalty payment (calculated using formula 5-a);
DKZbur - the licensee's average annual savings on depreciation of capital costs compared with the costs of the base enterprise during the period of royalty payment (calculated using formula 6-a);
Рп - marginal royalty rate;
Ссн - the average annual cost of sales of licensed products for the period of royalty payment (determined from accounting documents).

DTZbur = TZ/100 (SiТЗiDTЗi - SPPjDTЗj), (5-a)

where: TZ - the amount of average annual current costs at the base enterprise, recalculated to the capacity of the licensee's enterprise (determined according to the accounting documents of the base enterprise);
ТЗi - the percentage of savings of the i-th element of the licensee's current costs compared to the costs of the base enterprise (determined by the accounting documents of the licensee's enterprise and the base enterprise);
DTZi, DTZj - the share of the i-th (j-th) cost element in the total average annual current costs of the base enterprise (determined by calculation based on the accounting documents of the base enterprise);
PPj is the percentage increase in the costs of the j-th element compared with the costs of the base enterprise (if this occurs), determined by calculation in the accounting documents of the enterprise.

DKZbur = VK/100 (SiКЗiDКЗi/ti - SjPPjbDКЗj/tj), (6-a)

КЗi - percentage of savings for the i-th group of capital costs of the licensee compared to costs at the base enterprise;
DKЗi, DKЗj - share of the i-th (j-th) group of capital costs in gross capital investments at the base enterprise
ti, tj - payback period of the 1st (j-th) group of capital costs at the base enterprise (in years);
PPjb is the percentage increase in the costs of the j-th group of the licensee, compared to the costs at the base enterprise.
If the magnitude of the net savings on costs differs between the years of the royalty payment period, the net savings can be calculated for each year, and then its average annual value is calculated.

METHOD "b" (distribution of costs and income - taken into account)

This method is used when selling separate and associated licenses, as well as unlicensed know-how, if;
- the license or know-how is related to the construction of a new enterprise and its commissioning or the modernization of an existing enterprise;
- the object of the license or know-how includes an innovation that leads to a reduction in the time of construction or depreciation of enterprises, commissioning and bringing to design capacity and/or optimization of the distribution of capital investments;
- there is data that allows you to compare these indicators with the indicators of the base enterprise or with industry average indicators.
Method "b" is based on bringing the amount of capital investments and the licensee's expected income during the period of royalty payment to the current period of time and comparing them with similar indicators of the base enterprise. Therefore, the additional profit received by the licensee from using the IP is called “discounted additional profit”. Its value is determined by formula 7-b:

where: DPezur is the amount of the licensee's reduced additional profit from savings on current costs (taking into account the distribution of cash flows);
n is the year of completion of construction of the licensee’s enterprise;
m is the year of completion of construction of the base enterprise;
T - royalty payment period (in years);
Pvt - gross profit in year t at the base enterprise (including depreciation), determined by accounting documents;
DТЗt - savings on current costs in year t at the licensee’s enterprise, compared to the base enterprise (determined by formula 8-b);
SD - discount rate determined in the manner adopted when valuing any property;
KZtb - capital costs in the construction of the base enterprise in year t (determined from the accounting documents of the base enterprise);
DKZtb - savings on capital costs (compared to the base enterprise) in year t during the construction of a licensed enterprise.
Savings on current costs, taking into account the distribution of costs and income over time DТЗр; is determined by a formula largely similar to formula 5-a:

DTZur = Osl (SDTZiNPcibTsrzi - SPPzj NPcjb Tsrzj), (8-b)

where: Osl is the average annual output of licensed products (in physical terms), determined by accounting documents;
TZi - the percentage of savings of the i-th element of the licensee's current costs compared to the costs of the base enterprise (determined from the accounting documents of the licensee's enterprise and the base enterprise);
NPcib, NPcjb - average consumption rate of the i-th (j-th) cost element per unit of production at the base enterprise (in physical terms);
Tsrzi, Tsrzj - market price of a unit of the i-th (j-th) cost element;
PPzj is the percentage increase in the costs of the j-th element compared to the costs of the base enterprise (if this occurs).
Savings on capital costs are determined by formula 9-b, which is largely similar to formula 6-a:

DKZur = VK / 100 (SiКЗiDКЗi - DjPPjbDКЗj), (9-b)

where: VC - gross capital investment in the base enterprise, in terms of the capacity of the licensee's enterprise;
KZi. - percentage of savings in the i-th group of capital costs of the licensee compared to costs at the base enterprise;
DКЗi, DK3j - share of the i-th (j-th) group of capital costs in gross capital investments at the base enterprise
PPjb is the percentage increase in the costs of the j-th group of the licensee, but compared with the costs at the base enterprise.
If the net cost savings differ between the years of the royalty payment period, the net savings can be calculated for each year, and then its average annual value is calculated.
The marginal royalty rate Rpur is determined by formula 10-b, similar in structure to formula 4-a (but taking into account the distribution of cash flows over time):

Rpur = DPazur / Cppr, (10-b)

where: DPezur is the average annual additional profit of the licensee from the implementation of the license (due to savings in current and capital costs), taking into account the distribution of costs and income over time, determined by formula 11-b (similar to formula 3-a):

DPezur = DTZur + DKZur, (11-b)

where: DТЗр is the average annual value of the licensee's savings on current costs compared to the current costs of the base enterprise during the period of royalty payment, taking into account the distribution of costs and income over time (calculated using formula 8-b);
DKZur - the licensee's average annual savings on depreciation of capital costs compared to the costs of the base enterprise during the royalty payment period (calculated using formula 9-b);
SPR is the present value of net sales of licensed products for the period of royalty payment, determined by formula 11-b:

Sppr = SCp / (1 + SD)t, (11-b)

where: Cpt is the cost of net sales of licensed products in year t,
t = (n + l), (n), (n - 1),..., (n + T), where:
n - year of completion of construction of the licensee’s enterprise:
T - royalty payment period (in years).

METHOD "c" (additional profit from a higher price for licensed products)

Additional profit Dpl, as noted above, can also be obtained due to a higher price for licensed products compared to the base (analogue price) and is calculated using the formula:

Dpl = VOL (Tso - Tsa), (12-v)

where: VOL - average gross volume of licensed products for the year during the period of royalty payment (in natural units);
Tso - unit price of licensed products;
Price is the price of a unit of product taken as the basic analogue.
The marginal royalty rate Rp is calculated using the formula:

Rp = VOL (Tso - Tsa) / Spr, (13-v)

where: Spr is the average annual cost of sales of licensed products during the royalty payment period.
If additional profit is obtained by the licensee both from an increase in the price of licensed products and from savings on current and capital costs, it can be calculated using the following formula:

DPL = DPL + DPLc, (14-in)

where: Dpl - additional profit of the licensee;
DPle - additional profit (with a plus sign) or additional costs (with a minus sign) of the licensee due to savings (or increase) in current and capital costs;
DPlc - additional profit from increasing the price of licensed products.
The marginal royalty rate is determined by the formula:

Rp = (DPle + DPlc / Spr), (15-v)

The result of the first stage is the receipt of estimated amounts of additional profit and the marginal royalty rate.

STAGE 2

At this stage, possible deviations of additional profit and the marginal royalty rate from the calculated one under the influence of production and commercial risks are taken into account.
a) Production risk is determined by the fact that the licensee's enterprise may not achieve design production parameters.
This depends on the degree of development and implementation of the licensed technology. And therefore, the additional profit may be less than the calculated value. In this regard, an amendment is made to the calculated additional profit DПлп and the marginal royalty rate Рп depending on the degree of production risk. The amendment is made in accordance with the most likely percentage of the technology achieving the specified parameters. The following formulas are used for this:

Dplp = Dpl * b / 100, (16)

where: DПлп - additional profit of the licensee adjusted for production risk;
DПл - estimated additional profit of the licensee;
b is the probability that the licensee’s enterprise will achieve the specified production parameters (in %).

Rpp - Rp * b / 100, (17)

where: Rpp - marginal royalty rate, adjusted for production risk;
Рп - estimated marginal royalty rate.
As a guide, the probability b values recommended by I. S. Mukhamedshin can be used, depending on the level of implementation of the licensed technology (see Table 3):

Table 3

b) Commercial risk is associated with the fact that there is an opportunity
- incomplete use of enterprise capacity
- incomplete sales of licensed products due to insufficient market demand and competition from manufacturers of similar products.
An adjustment to the estimated additional profit DPlk and the marginal royalty rate Rpk, depending on the degree of commercial risk, is made in accordance with the most probable percentage reduction in the cost of average annual net sales, compared to the calculated one, using the formulas:

DPlc = DPl (100 - h) / 100, (18) and

Rpk = Rp (100 - h) / 100, (19)

where: h is the most probable percentage decrease in the average annual cost of net sales compared to the calculated one.
The most probable percentage reduction in the cost of sales (h) is determined (in the case of a symmetric probability distribution) as the weighted arithmetic average of a series of possible percentage reductions in the cost of sales, weighted by the probabilities of each member of this series.
However, we have to admit that in the theory of property valuation there are still no practically applicable and sufficiently theoretically justified methods with the help of which practicing appraisers could calculate the values of b. For example, using the arithmetic mean in this case is not the best solution.

STAGE 3

The calculation of the additional profit due to the licensor DPlr and the actual royalty rate Rd is carried out using the formula:

DPlr = DPl * a, (20)

where: DПлр - additional profit due to the licensor;
a is the licensor’s share in the licensee’s additional profit;
Dpl - additional profit of the licensee.

Рд = Рп * a, (21)

where: Рп - marginal royalty rate.

It should be noted that the problem of determining the value of a is one of the weak points of the “marginal royalty” method. The value of a depends on a large number of factors that are difficult to formalize. Attempts to take into account, if not all, then at least some of them, led to the development of proposals to reduce the subjectivity associated with their use. One of these proposals (used in international economic practice is given below in table form). It allows you to take into account the influence of 4 factors:
- licensee’s market share;
- degree of exclusivity of the license;
- presence of patents in the license;
- degree of severity of market competition (see Table 4).

Table 4

Notes
1. For non-patent licenses, it is advisable to be guided by the minimum values of the limits, for patent licenses - by the maximum.
2. The average share of licensed products in the total volume of products sold of this type on the licensee’s market, estimated for the period of royalty payment.
3. Determined by the method of expert assessments based on an analysis of the market conditions for licenses and patents in the relevant industry.
The values of a obtained using Table 4 are recommended to be adjusted depending on the expected change (during the royalty payment period) in demand in the licensee’s market for this type of product. The correction formula looks like:

a1 = a * Kd, (22)

where the Kd value is determined using Table 5.

Table 5

Notes
1. Adjustment of a when demand decreases is recommended only when a > 0.2.
2. Adjusting a when demand increases is recommended only when a< 0,8.

METHODS FOR CALCULATING ROYALTY RATES BASED ON ACCOUNTING THE LICENSOR'S SHARE IN THE LICENSEE'S GROSS PROFIT

Advantages of the method: very low labor and time required.
Disadvantages of the method: less accuracy compared to the licensee's additional profit method.
Using this method, the royalty rate P is calculated using the following simplified formula:

P = l Pe, (23)

where: l is the share of royalties (in %) in the licensee’s gross profit (determined in accordance with the recommendations set out in Table 6);
Re - profitability of production of licensed products, defined as gross profit per unit of cost of net sales - that is, sales excluding indirect taxes on sales (in %). If information on the profitability of a particular licensee's enterprise is, for one reason or another, difficult to access for the appraiser, average data on the profitability of the relevant industry can be used.

Table 6

Note: it is advisable to adjust the figures indicated in Table 6, taking into account factors not taken into account in the table.

Advantages and disadvantages of the method: the same as that of the Mukhamedshin method (see above).
This method was proposed by O. Novoseltsev (Intellectual Property, 1998, No. 3; Assessment Issues, 1998, No. 3). It is based on the application of the formula:

P = Re * l / (1 + Pc), (24)

where: Re is the profitability of industrial production and sales of products under a license, defined as the ratio of the licensee’s profit to the cost of production and sales of products under a license;
l - share (part) of the licensor’s profit in the licensee’s total profit from the production and sale of products under the license (in %).
A feature of this technique is the possibility of using the profitability values of a specific enterprise. It can be calculated by submitting the accounting and financial statements of the enterprise (this data, according to the Decree of the President of the Russian Federation, appears as a commercial secret and can be obtained for a set fee from the State Statistics Bodies!). Or according to official statistical data on the profitability of individual industries in a specific period of time, which are regularly published in specialized publications, as well as in statistical and analytical reviews of the state of industrial production in periodical information sources.
For example, in the weekly magazine "Economy and Life" (No. 34 (8675), August 1997) the profitability values of certain industries in Moscow were published, in particular, chemical and pharmaceutical - 44%, electric power - 43%, alcohol - 43% , confectionery - 28%, railway engineering - 26%, brewing - 25%, bakery - 22%, oil refining - 20%.
The Licensor's share in the Licensee's profit from production and sales can be selected depending on the volume of rights transferred, the degree of readiness of the licensed object and the availability of patent protection, which ultimately should reflect the entrepreneurial risks of commercial success in organizing the industrial use of intellectual property, production and sale of products under license.
Analysis of the functional dependence of the royalty value on the profitability of production under a license according to formula (24) explains, according to O. Novoseltsev, the downward trend in royalty values for material-intensive and resource-intensive industries. In them, the increased cost of production and sales of products under license (due to increased costs for materials and other resources) leads to an increase in the cost of production and, accordingly, to a decrease in the profitability value for the same amount of profit.
At the same time, the increase in royalty values for new high-tech technologies also becomes understandable, since advanced high-tech scientific and technical developments contribute (through the use of new material and resource-saving technologies) to reducing the cost of production, which, accordingly, increases the rate of profitability for the same mass arrived.
The use of the royalty rate according to the formula (24) proposed above in practical calculations also explains the increase in the value of royalties with an increase in the Licensor’s share in the Licensee’s profit by reducing the Licensee’s production and commercial risks. This happens by increasing the volume of transferred rights (ensuring a licensing monopoly), the degree of industrial development of the subject of the license (reducing the production risks of developing new products) and the presence of patent protection (a patent monopoly protected by state laws). Since all these factors ultimately contribute to increasing the likelihood of the Licensee achieving commercial success and generating additional profits.
It is easy to notice, however, that Novoseltsev’s method is an analogue of Mukhamedshin’s method and differs from it only in the use of the divisor calculation formula (1 + Re) in the denominator.

METHOD FOR CALCULATING ROYALTY RATES BASED ON UNIT COST INDICATORS

The advantage of the method: low labor and time costs.
Disadvantages of the method:
- lower (compared to the additional profit method) calculation accuracy
- the relatively rare existence of situations in which it is possible to find all the information necessary to apply this method. Calculation formula:

P = l * KZu * Pvkl, (25)

where: l is the share of royalties (in %) in the gross profit of the licensee (determined in accordance with the recommendations set out in Table 5);
KZu - specific capital costs per unit of sales (in relative shares);
Pvkl - gross profit per unit of investment (in%).
Both calculated indicators (KZu, Pvkl) are determined based on statistical data related to the relevant industry.

FORM OF REMUNERATION IN THE FORM OF LUMMARY AMOUNTS

The term "lump sum" comes from the German word "pauschal" - taken in bulk.
It is advisable to use this form of remuneration when:
- the basis for calculating remuneration in the form of “royalties” cannot be determined practically;
- control over the accounting and financial reporting of the licensee is difficult;
- the costs of counting and control operations are disproportionately large in comparison with the expected results;
- the method or conditions of use of the subject of the license make it impossible to apply the rule of proportional remuneration;
- the entire range of rights in relation to the subject of the license is transferred to the licensee (similar to the purchase and sale agreement);
- a license agreement is concluded by a little-known independent licensee, when there is no real opportunity to exercise effective control over the licensee’s activities in using the licensed object;
- there is no industrial development of the subject of the license;
Based on the frequency of lump-sum payments, they are divided into:
a) one-time lump sum payment with receipt of money only once;
b) periodic lump sum payments, i.e. payment of strictly defined amounts in several ethanes depending on the use of the IP by the recipient (licensor). For example, annual lump sum payments.
Often the frequency of lump sum payments depends on the stage of implementation of the license agreement. In this regard, the following procedure is used:
- 10 - 15% is paid upon signing the license agreement;
- 15 - 20% is paid after mastering the technology;
- the remaining 65 - 75% is paid at the end of the first year of production of licensed products.
Periodic payments in relation to copyright objects are divided into linear, progressive and degressive (see above).
Lump sum payments are usually particularly beneficial to the licensor. Along with the absence of the need to exercise control over the activities of the licensee, it is associated with the one-time receipt of a sufficiently large amount of money. But sometimes this form of payment of license fees turns out to be unprofitable for the licensor. Indeed, in some cases, with a lump sum payment, he is deprived of the opportunity to receive excess profits from a significant expansion by the licensee of the volume of production of licensed products.
At the same time, the need to pay significant amounts before receiving a profit, as well as the higher degree of risk associated with the acquisition of a license, leads to the fact that the licensee does not always agree to pay the license fee in the form of lump sum payments.
Determining the size of a lump sum payment by simple arithmetic addition of the amounts of payments determined on the basis of royalties for the entire period of the license agreement will be inaccurate due to the change in the “value” of cash depending on the period of its receipt, caused by the state of monetary relations.
According to the general rule in international trade in licenses, the licensor seeks to receive such an amount of lump sum payments that, if invested in the bank, would provide him with a profit equal in size and time to receipt of the license fee in the form of royalties. In turn, the licensee strives to reduce the price of the license when paying in the form of lump sum payments. The reduction factor is calculated using standard methods of financial mathematics using the compound interest formula.
Using the discounting method, current royalty payments can be reduced to a lump sum payment. And, conversely, reduce the lump sum payment to the average royalty level for the entire period of the license agreement.

COMBINED FORM OF REMUNERATION

It should be borne in mind that in some cases the payment of license fees in the form of lump sum payments or in the form of royalties may be unacceptable for one of the partners or for the licensee and licensor at the same time. And, for example, in this case, the owner of the IP requires payment of a lump sum for the provision of a license and subsequent ongoing royalty payments.
In such cases, combined (mixed) payments can be used. In this case, initial (lump sum) payments are paid during the initial period of validity of the license agreement (usually after signing the license agreement), before the start of commercial use of the licensed object.
The rest of the license fee is paid in the form of royalties in the process of commercial use of the licensed object at the end of each reporting period.
Initial payments in most cases are considered as an advance and serve as a kind of guarantee of the seriousness of the licensee’s intentions, which is very important for the domestic practice of trading licenses. At the same time, they allow you to recoup the costs of preparing and concluding a license agreement, producing and translating technical documentation, other tangible media of information about the transferred technology (samples, special equipment, instruments), as well as fulfilling other terms of the agreement. Initial payments in certain cases may also offset the costs of research and development of the subject matter of the license.
It is recommended to set the amount of initial payments within the limits of up to 25% of the license price, determined in the form of royalties. To translate this value into combined payments, it is recommended to set the amount of the initial payments and then reduce the royalty rates accordingly.
In order to encourage the licensee to master the subject of the license, it is advisable in licensing agreements to provide for minimum guaranteed payments when paying license fees in the form of royalties, including in the presence of initial payments. They are recommended to be paid at the end of the reporting period. At the same time, it is not advisable to establish a dependence of payment on the results of mastering the subject of the license, production volumes and sales of licensed products. As already mentioned, it is desirable that the amount of the initial and minimum guaranteed payments does not exceed 25% of the total royalty payments. It is necessary to differentiate this amount depending on the types of license agreements (for a full and exclusive license - up to 75%, for a non-exclusive license - up to 50%). Annual minimum guaranteed payments are fixed in the text of the license agreement.