Taxation Of Licensing Agreements

To Mondis v. Wistron, the parties have entered into a patent license agreement (“PLA”) that allows Wistron, a Taiwanese manufacturer of consumer electronics, to use certain patents of Mondis, a non-practicing English company, provided that Wistron pays certain royalties and “assumes and pays all duties, taxes and taxes (including, but not limited to, sources, sales and VAT”). When a dispute arose over Wistron`s payments under the agreement, the parties went to arbitration and the court issued an arbitration award requiring Wistron to pay Mondis more than $3 million in royalties, interest and unpaid fees. The price said nothing about the tax obligations of either side. In November 2016, a U.S. District Court ordered a Taiwanese company to pay taxes on royalties it had paid to a foreign licensor, when those taxes are usually the licensor`s obligation. Mondis Technology Ltd v Wistron Corporation, Case No. 15-cv-02340-RA (S.D.N.Y. Nov. 3, 2016).

A few years earlier, the same licensor forced another Taiwanese licensee to pay his Taiwanese taxes. Mondis Technology Ltd v. Chimei-Innolux Corp., Case No. 2:11-cv-378-JRG (E.D. Tex. 30 April 2012). Key findings are to pay attention to tax issues throughout the licensing process, in calculating license numbers and rates, when designing agreements, payments and dispute resolution, and to address these issues quickly with counterparties and decision-makers, in order to avoid costly surprises. This aspect of the double taxation convention must be taken into account by the parties to a licence agreement, otherwise serious uncertainties in the relationship will be created. There will be no problems if the double taxation treaty provides for the full payment of tax in the country of the licensor (as in the treaties concluded between Russia and the United States, the United Kingdom, Germany, France and Switzerland). However, Russian double taxation treaties with a large number of countries (including China, India, Japan, Spain and South Korea) provide for the possibility of imposing a tax of 5% to 15% on royalties in the licensee`s country. In most of these countries, including Russia, the collection of this tax is carried out by withholding tax of payment.

Therefore, in this case, the customer would have to withhold the tax of a reasonable amount and transfer it to the tax administration of his own country. As a result, the amount received by the licensor is less than the amount indicated in the contract. If the parties do not address this issue in the treaty, it could lead to conflicts. In addition, double taxation treaties allow taxes to be imposed on licence revenues, either in the country of the licensor or (in whole or in part) in the country of the licensee. In the latter case, the convention sets a tax rate in the licensee`s country and includes a double taxation avoidance mechanism by accounting for the amount paid in the licensee`s country as part of the licensor`s tax obligations upon presentation of the corresponding documents. In both cases, a United States court held that the Taiwanese company was not entitled to withhold taxes on the royalties, as required by Taiwanese tax law; Instead, the Taiwanese company had to pay the licensor`s taxes out of its own pocket….