Azerbaijan: Specifics Of Concluding A License Agreement In Azerbaijan

I. Definition of a license agreement

A license agreement is a written contract by which one party that owns certain Intellectual Property (IP) gives another party permission to use that IP. The two parties involved in this agreement are a licensor and a licensee.

The licensor is the party that permits another party to use IP.

The licensee is the party that gains such permission.

By the types of IP being licensed, the license agreement can be divided into:

• trademark license agreement;
• patent license agreement;
• copyright license agreement.

The legal definition of the Trademark License Agreement is provided in Art. 28 of the Law on trademarks and geographical indications dated 12 June 1998 No. 504-IQ (hereinafter "The Law on Trademarks") and in Art. 1.8 of the Decree of the Cabinet Ministers of the Republic of Azerbaijan on "Approval of the procedure on the registration of the agreements on trademarks" dated 15 September 2009 under No. 139 (hereinafter "Decree No. 139").

Under a trademark license agreement owner of the trademark (a licensor) grants the other party (a licensee) permission to use a trademark in relation to the goods and services specified in the agreement.

According to a patent license agreement, the patent owner (licensor) grants the right to exploit an invention, utility model and industrial design to another legal entity or individual (licensee) in a scope stipulated by the agreement.

II. Exclusivity of a license agreement

Upon granting or receiving a license under intellectual property rights (IPRs), the parties need to consider the degree of exclusivity that will be granted. Thus, the license agreement can be divided into:

• exclusive license agreement;
• non-exclusive license agreement;
• sole license agreement.

Under an exclusive license agreement, a license can be granted only to one licensee (Art 1.8. of Decree No. 139). An Exclusive License means that no person or company other than the named licensee can use the relevant IP.

Notably, the licensor is also excluded from exploiting the intellectual property rights.

According to the said Article of Decree No. 139, the licensor reserves the right to use the trademark and the right to issue licenses to other persons under a non-exclusive license. So, the licensor can license the IP out to more than one licensee in a non-exclusive license.

The local laws also provide the legal definition of a sole license agreement. Under Decree No. 139, the sole license is issued to only one licensee. In this case, the licensor retains the right to use the trademark in connection with the goods and services specified in the contract and loses the right to issue licenses to other persons.

The widespread form of licensing is a non-exclusive license agreement in practice.

III. Key terms of a License Agreement

A License Agreement must include the following essential elements:

• subject matter;
• duration;
• territory allowed for the IP use;
• license fee;
• parties' obligations;
• quality control.

The subject matter of a License Agreement is a registered IP:

• patent;
• trademark;
• copyright.

As with any agreement, a License Agreement must specify the period during which the parties' obligations will enter in force and expire. A license under the Trademark License Agreement can be issued for a validity period of a trademark or a shorter period.

The licensed territory is a territory where the licensee uses the granted rights under the agreement. It is essential to state in the License Agreement that a right to use a trademark is vested in Azerbaijan. Otherwise, upon submission of the documents for the registration of the License Agreement, the Intellectual Property Agency will refuse registration due to the absence of the relevant provision covering the territorial right.

According to Article 1.11 of Decree No. 139, the quality of the goods or services of the licensee must not be lower than the quality of the goods or services of the licensor, and the licensor must monitor the fulfillment of this condition. The existence of such provision (quality assurance) in the License Agreement protects the trademark owner's reputation by specifying certain minimum quality standards that the licensee must meet. Quality control is, therefore, the essence of trademark licensing. The absence of the relevant clause will lead to rejection in the registration of the License Agreement.

IV. Registration of a Licensing Agreement

The disposal of IPRs requires enhanced legal protection. In light of this, an important aspect here is the state registration of a License Agreement.

The application for the registration of the license agreement is submitted in the Azerbaijani language.

The supporting documents can be submitted in Azerbaijani and other foreign languages. Upon submitting the documents in a foreign language, the translated documents in Azerbaijani have to be submitted within one month.

The list of the required documents is:

• application form;
• license Agreement;
• copy of the Trademark Certificate, patent, etc.;
• corporate documents of the applicant (TIN, Extract from the Registry, Charter) (upon submitting of the documents on behalf of the legal entity);
• ID card and a TIN of the individual (upon submitting of the documents by the individual);
• PoA (if the document is submitted by the representative).

The documents are reviewed within one month.

The information on the License Agreement is registered in the State Registry.

Information on the registration of the License Agreement in the State Registry is published on the official bulletins of the Trademark Agency.

The chart/table illustrating the registered trademark/patent license agreements can be seen as below:

V. Taxation under a License Agreement

The status of the license fee should be clarified from the Azerbaijani tax regulations perspective. It should be noted that the license fee for the right to use IP rights objects falls within the definition of the royalty provided for in the Azerbaijani Tax Code.

Under the Tax Code, "royalty" means any kind of payments received as consideration for the use of, or the right to use, (i) copyrights on works of literature, art or science; software and cinematograph films and other intangible assets; (ii) any patent, trademark, design or model, plan, secret formula or process, or information concerning industrial, commercial or scientific experience; (iii) industrial, commercial or scientific equipment (Art. 13.2.23).

Thus, license fees paid by a licensee to a licensor under a license agreement will qualify as royalty payments for taxation purposes.

Taxation of non-resident licensors. Taxes applicable to non-resident licensors are described in the table below.

Withholding Tax. As per Article 125.1.7 of the Tax Code, payments of resident licensees made for the use of IP objects to non-resident licensors are subject to WHT at a rate of fourteen (14) percent. It is the local licensee's (tax agent) obligation to withhold 10% WHT from the license fee payable to the foreign licensor. It should be noted that the WHT applies to the gross income of a foreign licensor (i.e., decreases the amount of payable fees) unless the agreement provides for a "gross-up" clause.

VAT. Article 168 of the Tax Code determines the place of service for VAT purposes. As per the said Article, the place of services in case of the transfer of title on a license (including patent, trademark etc.) will be the place where the recipient of a license is incorporated. As the definition of the royalty does not include the transfer of title over an IP object, accordingly Article 168.1.5 of the Tax Code should not apply to royalty payments. Meaning that the local licensee may not pay VAT while making royalty payments to foreign licensors based on the language of Article 168.1.5 of the Tax Code.

Tax officials however interpret that transfer of title referred to in Article 168.1.5 of the Tax Code also concerns the right to use an IP right. In other words, they insist that VAT must apply to the royalty payments made to foreign licensors.

If we rely on the strict language of the Tax Code, VAT should not apply to royalty payments as Article 168.1.5 (to which the tax authority is making a reference) applies only if the full ownership on an IP right is transferred, which is not the case in a license agreement.

Based on the research into the public database of court judgments, there is a case (#2-1(102)-463/2021) with this respect where the Supreme Court of Azerbaijan has made a decision in favor of the taxpayer. The Supreme Court has held up the position of the lower court, which was stating that VAT could not be charged on the royalties as they do not include the transfer of full ownership right over IP objects.

The current position of the tax authority leads to the displeasure of taxpayers. We hope that the tax authority will change its approach in practice, or respective provisions of the Tax Code will be amended for eliminating such inconsistency.

Avoidance of Double Taxation. Double Tax Treaties to which Azerbaijan is a party provide lower tax rates (e.g., 5%, 8%, 10%) for royalty payments. It is worth to note that the lower tax rates do not automatically apply. To benefit from a lower tax rate specified in DTTs, the non-resident (or its authorized representative) shall submit a specific application form (DTA-03) to the relevant tax authority. The DTA-03 form shall be submitted before the payment is made by the local licensee. If it is not submitted and an approval is not received from the tax authority, the local licensee is obliged to withhold the tax at a higher rate specified in the Tax Code (i.e., 14%) and remit it to the state budget.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.