Calling it a "Royalty" Doesn't Mean You Have to Suffer Withholding Taxes in Cross-Border Transactions

In our international taxation practice, we often encounter situations where there is a material disconnect between how transactional matters are viewed as between different countries or different parties. These distinctions can have dramatic impact on the taxation posture of multinational clients. It is important to be able to identify these situations and turn them to your advantage via agreements with pertinent tax authorities.

We recently had such a situation where our client has been able to recover a 10-figure amount from several tax authorities. Our client is a software developer based in another country. It "licensed" some of its software to third parties to provide access for certain purposes. The "licensees" paid "royalties" to our client and withheld taxes on such royalties.

There is a specific definition of the term "license" and "royalty" in international taxation. According to this definition, we advised our client that these payments were not "royalties" and that the withholding taxes should be refunded with interest. We filed the claims for refund, conducted discussions with the tax authorities and our client has received refunds with interest.

In this type of situation, your Tax Department can actually become a profit center via the cash generated from the interest on the tax refunds.