Introduction: Importance of Royalties in International Trade
Royalties are a central element in international trade and particularly concern the use of intellectual property such as patents, trademarks, or designs. Through a license agreement, the licensor grants the licensee the right to use certain proprietary rights. For this use, the licensee pays the licensor a regular or one-time fee.
Licensor, Licensee, and License Agreement – Basic Structure of Licensing Models
The role of royalties should not be underestimated: they allow companies access to innovative technologies, well-known brands, or exclusive designs while providing revenue for the rights holder. The correct calculation and documentation of these payments are crucial for both parties, as they not only regulate contractual relationships but are also essential for compliance with tax and customs regulations. Transparent documentation of royalties ensures that all information about usage, payment amounts, and calculation bases is traceable – a critical aspect for lawful execution and later review by authorities.
What are Royalties? Definition and Delimitation in Customs and Tax Law
Royalties refer to all payments for the use of intellectual property such as patents, trademarks, copyrights, or other forms of intellectual property. The definition includes both ongoing and one-time payments, depending on the design of the license agreement.
Distinguishing Royalties from Purchase Price and Services
It is important to clearly distinguish royalties from other payments, such as purchase prices for goods or fees for services. This distinction is particularly crucial for tax treatment and compliance with customs regulations. While the purchase price reflects the value of the goods themselves, royalties relate to the right to use certain intangible assets. The correct classification and treatment of these payments are essential to avoid errors in calculating customs value and the tax base for import duties.
FG Hamburg: Royalties as Part of the Customs Value (Judgment of 21.05.2025 – Ref. 4 K 137/21)
Legal Question: Do Royalties Paid to Third Parties Increase the Customs Value?
Royalties paid to third parties independent of the seller can also increase the customs value of imported goods according to Articles 71 and 72 of the UCC, which govern the addition of certain costs and possible deductions in the transaction value. This was decided by the Hamburg Fiscal Court in its judgment of May 21, 2025 (Ref. 4 K 137/21). Royalties are considered additions under customs law and can affect the customs debt as well as the tax base for customs duties and import VAT.
The importer is responsible for accurately determining the customs value, declaring the goods at the point of entry at the EU border, and providing complete documentation during customs clearance. Import VAT is levied on the determined customs value, with the importer liable for the proper declaration and payment of this tax. Documentation of invoices and contracts is crucial for deducting royalties for tax purposes and claiming the paid VAT as input tax, provided there is a proper invoice. Double taxation agreements often stipulate that royalties are usually taxed only in the licensor’s country. The tax treatment of royalties can have significant implications for a company’s overall financial planning. Royalties may also be subject to trade tax if they are considered business income; small businesses and self-employed individuals can benefit from allowances.
However, the condition is that the buyer cannot acquire the goods without paying the royalties, according to the legal firm MTR Legal Attorneys, which advises on customs law among other things.
Royalties to Independent Third Parties and Licensees
Case: License Agreement, Subcontractor, and Trademark Rights
The Hamburg Fiscal Court had to address whether royalties paid by an importer to a third party should be included in the customs value of imported goods, even if the licensor is not the seller of the goods. In the underlying case, a company had signed a contract with the licensor that granted it the exclusive use of certain trademarks. The licensee had the goods produced by a subcontractor abroad, having committed to the licensor to adhere to certain quality and social standards.
Practical Example: Royalties in Software and Trademark Imports
Example: A company imports software from abroad and pays royalties to the rights holder. The software is developed and delivered by a third party, while the royalties for using the software are paid separately to the licensor. In such cases, the question arises whether these royalties should be included in the customs value of the imported software. The tax treatment depends on whether the payments are directly related to the import or occur independently.
During an audit, the customs administration argued that the royalties payable to the licensor increased the customs value of the imported goods. The company disagreed, reasoning that the payments were not directly economically related to the purchase and import of the goods but were independent of them.
When Are Royalties a Prerequisite for Acquiring the Goods?
Influence of the Licensor on Production, Quality, and Supply Chain
The underlying license agreement contained several features that made its customs classification particularly relevant. The royalties were not only based on the sales success of the goods but were also secured with minimum payments that could be incurred regardless of actual sales. Various licensing systems existing in the market affect the structure and amount of royalties, as they provide different usage rights, support services, and requirements for the licensee. Additionally, the license agreement compelled the licensee to use only certain subcontractors for production and to adhere to extensive quality and social standards. Thus, the licensor’s rights significantly extended into the actual manufacture of the goods. The customs administration argued that the royalties were functionally and economically a part of the purchase of the goods and must be considered according to EU customs valuation regulations.
The Hamburg Fiscal Court confirmed this view. In its opinion, royalties are a part of the customs valuation because they are considered a “condition of the purchase agreement” under the Union Customs Code. What matters is not who receives the payment but whether it is closely economically linked to the manufacture or acquisition of the goods.
Inclusion of Royalties in the Customs Value According to the Union Customs Code
The court determined that the license agreement should not merely be understood as an accompanying arrangement for the distribution of goods but had a direct influence on the production method and availability of the goods for the importer. The importer can only source the goods if he complies with the license conditions and pays the royalties. Thus, according to the Hamburg Fiscal Court, the payment constitutes a service necessary for the acquisition of goods, which must be included in the customs value.
In connection with the payment of royalties, it should be noted that the recipient (licensee) has tax obligations to fulfill, particularly with respect to correct billing and any deductions in the taxation of royalties.
Transaction Value and Additions According to Art. 71 UCC
The customs value is based on the so-called transaction value under EU law, i.e., the price actually paid or payable for the imported goods. Supplements are added to this price if the buyer pays the seller or a third party charges considered a condition for the transaction’s conclusion. The Hamburg Fiscal Court emphasized that such a condition does not need to be explicitly stated in the purchase agreement. It suffices if the licensee could not factually obtain the goods without paying the royalties. This was the case here because the license agreement granted the rights holder extensive influence over production and distribution decisions, and the use of the brand was inseparably linked to the manufacture of the goods.
Calculation and Documentation of Royalties for Customs and Taxes
Documentation Obligations in Customs Audits and Tax Assessment
The calculation of royalties is usually based on the transaction value of the respective license. Various factors play a role, such as the type of licensed rights, the scope and duration of use, and the conditions agreed in the license agreement. Licensors and licensees should clearly define the calculation method and the amount of royalties in the license agreement to avoid later uncertainties. Careful documentation is essential: it includes recording all payments, describing the license terms in detail, and proof of actual use of the licensed intellectual property. For companies, it is particularly important to heed the requirements of customs law, as under certain circumstances royalties can affect the customs value and thus the tax base for import duties. Complete and transparent documentation facilitates customs inspection and ensures that the calculation of royalties and their inclusion in the value of goods are correct and lawful.
Proper Design of License Agreements: Avoid Customs Risks
Early Review of Customs-Critical Contractual Clauses
Furthermore, the licensor imposed extensive requirements for the selection of manufacturing plants and production standards. This resulted in the creation of the goods being embedded in the licensing model. The royalties were therefore not just “somehow” related to the goods but were an essential part of the production process. Under these circumstances, the customs valuation relevance was clearly given, the Hamburg Fiscal Court emphasized.
The judgment strengthens the position of customs authorities and increases the importance of careful customs-related contract design.
MTR Legal Attorneys advises comprehensively on Customs Law.
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