Businesses in the software, publishing, media and internet industries may prefer to assign, rather than licence, copyright and intellectual property for commercial reasons. However, the Australian Taxation Office (ATO) has recently stated in Taxation Ruling TR 2008/7 that an Australian Company (AusCo) that pays for an assignment of copyright from a Foreign Company (ForeignCo) may be liable to royalty withholding tax even though the assignment appears to be an outright sale and not a licence or royalty arrangement.
For Australian tax purposes, an AusCo that makes a payment to a ForeignCo that is a "royalty" is liable to withhold royalty withholding tax from that payment and remit the tax withheld to the ATO. If the payment is not a royalty, no withholding tax is payable.
Therefore, it is critical for Australian business to consider whether they have an obligation to withhold royalty withholding tax from any payment it makes to a ForeignCo for the assignment of, or right to use, copyright and other intellectual property rights. AusCo may be required under the terms of an assignment or licence agreement with ForeignCo to gross up its payment to ForeignCo to compensate for any royalty withholding tax withheld. The gross up may itself be liable to royalty withholding tax and the gross up will be an additional cost to AusCo.
What is a royalty payment?
A payment or credit for the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trademark or other like property or right is a royalty. An outright sale or transfer of ownership of copyright, and other intellectual property, would not be a royalty.
Taxation of royalty payments
In TR 2008/7, the Commissioner of Taxation states that the terms of an agreement to assign copyright will need to be carefully considered to determine if the assignment amounts to an outright sale or a grant of a licence to use that copyright. The factors to consider include:
- the estimated legal life of the copyright
- the geographical extent of the assignment
- whether all of the rights associated with the copyright are to be assigned
- any limitation on the assignment as to the class of acts that the copyright assignee has the exclusive right to do, and
- whether the amount and timing of the payments are dependent on the exploitation of copyright by the assignee.
What should you do?
It is important to understand the Australian tax implications of an assignment, transfer or licence of intellectual property involving offshore entities. In particular, AusCo will need to review the contractual terms of any licence and assignment of intellectual property it has with a ForeignCo to determine if AusCo has an obligation to withhold royalty withholding tax, and more importantly, whether the payment to ForeignCo is to be grossed up for tax that is withheld in Australia. Any gross up of tax will be an additional cost to AusCo. The Deacons tax group can provide advice on whether a payment for the assignment, or use, of intellectual property is a royalty payment and draft appropriate withholding tax clauses for inclusion in agreements.
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.