Copyright licences allow a business to use a work created by a copyright owner in an agreed upon manner. In return for this use, the business usually makes an ongoing payment to the copyright owner. These licensing fees generally fall within the definition of a “royalty”. In this article, we look at the nature of copyright licences and royalties and explain when royalty withholding tax is payable on copyright licences.

Copyright Licences

Copyright is a form of intellectual property (IP) protection that gives its owner the exclusive right to use a work. It applies to literary, dramatic and musical works: even the source code of a piece of software. The copyright owner can make money from their work by transferring some, or all, of their rights through a licence or assignment.

However, a licence is different to an outright sale of copyright. Some key differences are identified in the table below. 

Assignment Licence
Involves the transfer of all rights relating to the copyright for the remainder of its life. Limited to specific rights, or specified use of the copyright.
Extends geographically over one or several countries. Restricted to a particular region or country as identified by the parties.
Payment does not change depending on  how much the copyright is exploited. Requires payment of royalties, depending on the exploitation of the copyright.

 

Withholding Tax on Royalties

Australian businesses must pay a withholding tax on any royalties they pay to a foreign resident for use of their IP. This places the tax burden on the Australian resident making the royalty payments. Therefore, it is important to know when this obligation arises. 

Key Definitions

A foreign resident is any entity that is not an Australian resident, and includes an individual, company or trust.

Generally, royalties are payments or credits paid in installments or a lump sum, in return for a copyright licence. However, be aware that the definition of a royalty may differ under various double tax agreements (DTAs). To determine whether payments are actually royalties, look at all features of the transaction and the agreement. 

When to Pay

Broadly, an Australian resident must pay royalty withholding tax if they pay royalties to a foreign resident for use of their IP.

Therefore, any Australian business that is thinking about licensing IP from a foreign business should first seek tax advice to determine:

  • if they will be subject to royalty withholding tax; and
  • if so, whether it applies at:
    • the 30% domestic royalty withholding tax rate; or
    • a lower royalty withholding tax rate under an applicable DTA.

Australian residents (or foreign residents subject to Australian royalty withholding tax as outlined above) must pay the withholding tax to the Australian Taxation Office. As a result, they must also issue payment summaries to payees (IP owners), and may need to lodge a PAYG summary.

When Not to Pay

Australian royalty withholding tax does not apply:

  • where an Australia resident collects royalties through a fixed place of business (permanent establishment) it has in a foreign country. This is because the expense is attributed to the permanent establishment, and is therefore outside the Australian tax net; or
  • to foreign residents, unless they operate in Australia and have a fixed place of business here.

Key Takeaways

Australian residents who pay royalties to foreign residents for copyright licences may be subject to royalty withholding tax. However, this will depend on:

  • the circumstances of the transaction;
  • the definition of royalties; and
  • any overriding provisions of an applicable DTA.

Therefore, because of this tax risk, you should seek tax advice before entering into an assignment or licence to understand what the tax implications are. If you need assistance with tax and copyright royalties, get in touch with LegalVision’s taxation lawyers on 1300 544 755 or fill out the form on this page.

Elodie Somerville
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