What is a royalty?
A royalty is a recurring payment for the right to use someone else’s asset: a patent, trademark, copyright, software, know-how, franchise system or natural resource. It is usually priced as a percentage of revenue or units sold, sometimes as a fixed fee per period, and it lets the owner monetise the asset without selling it.
How royalties work in practice
The licence agreement does the heavy lifting. It defines the base (net sales need a precise definition, with agreed deductions), the rate, minimum guaranteed royalties, audit rights over the licensee’s books, currency and withholding gross-up, term and territory, and what happens on termination. In software and SaaS the same economics often appear as revenue share; in franchising as an ongoing franchise fee; in music and publishing as splits managed by collecting societies.
Royalties under Turkish law
Turkish law protects the underlying assets through the Industrial Property Code (patents, trademarks, designs) and the Law on Intellectual and Artistic Works (copyright), and the licence itself is a contract governed by the Code of Obligations. The tax layer is where cross-border deals get interesting: royalty payments to non-resident owners are treated as intangible-rights income and are subject to withholding tax in Türkiye, with double tax treaties typically reducing the domestic rate; reverse-charge VAT also applies to imported licences. Transfer pricing rules require intra-group royalties to be at arm’s length and documented. Getting the withholding and gross-up clause right in the contract is usually worth more than the rate negotiation itself.
How are royalty rates set?
Market comparables where they exist, profit-split logic where they do not. In practice most sectors have customary bands, and minimum guaranteed royalties protect the licensor when sales projections are optimistic. For intra-group licences, the arm’s length principle governs and documentation is mandatory.
Who bears withholding tax on cross-border royalties?
Legally the Turkish payer withholds. Commercially it depends on the gross-up clause: if the contract says the licensor must receive the full amount net of taxes, the Turkish licensee bears the cost on top of the rate. Always model the treaty rate and certificate-of-residence logistics before signing.
Is a royalty the same as a licence fee?
A licence fee is often a one-off or periodic fixed payment; a royalty is usually usage-based. Contracts frequently combine both: an upfront fee plus running royalties. The label matters less than the base definition and the tax characterisation.
Related terms: licensing, intellectual property, trade secret.
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