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What are royalties and their types

Article image: What are royalties and their types

Royalty is one of the basic franchising tools. It is a source of revenue for franchise owners. In English the word "royalty" stands for the royal privileges, and in fact, it is a periodical payment for the use of logo, trademark, inventions, software and other subjects under license agreement.

In fact, you buy a ready-made franchise business alongside with educational materials for staff, support of your partners and favourable purchase prices. You only have to pay a certain amount or a certain percentage of the profits for the right to use all these benefits.

Besides, the concept «royalty» can be treated as an author's fee, rental fee for being in a possession to extract natural resources or use the subsoil fossils.

However, the concept of royalty does not apply to:

  • breeds of animals;
  • integrated microcircuits;
  • plant varieties;
  • inventions (their results, not the way of inventing);
  • data bases;

Royalties in offshore business

Royalty is also one of the classic offshore structures. Its essence lies in the fact that an offshore company registers a trademark in the patent office of the country of resident. Then it sells the right to use a trademark along with further royalty payments.

This solution allows you to optimize taxation, as the royalties that are paid to an account of the offshore company, are not subject to taxes. Moreover, royalty payments are included in the main cost and reduce the profit tax.

Clarify the cost of opening company, corporate or personal bank account, obtaining a residence visa, or another question regarding business in Dubai, UAE:

Basic types of royalties

As of today, royalties are calculated in three different ways:

  • A turnover percentage — its size is specified beforehand in the contract, and usually amounts 0.5-15%. The amount of royalty depends on the sales volume of the company for a certain period of time. This is the most popular type of royalties in the current market.
  • A percentage of the revenue (profit margin) is profitable for the production with clear price regulation of wholesale and retail sales. This system is also often used in the shops, which set different margins on goods.
  • Fixed rate is a regular payment which is specified in the contract. This amount depends on a number of parameters, such as the number of enterprises, the total floor area, the cost of services, the number of customers etc. Fixed rate is mostly used by companies that encounter difficulties when predetermining the level of revenue.

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