Intangible assets include trademarks, patents, software, know-how, designs, technical knowledge, copyrights, and all intellectual property elements owned by businesses. The intangible asset fee (royalty/license fee) to be charged for the use of these rights is of critical importance from both a commercial valuation and tax perspective. Under transfer pricing regulations in Turkey, the royalty must be determined using scientific and comparable methods.
1. Analysis of the Economic Value of the Intellectual Property Right
The first step is to identify the elements that constitute the commercial value of the intellectual property right in question:
- Brand awareness, reputation, and sectoral strength
- Uniqueness of know-how or technology
- Irreplaceability of software in the market
- Purpose of license use (production, sales, distribution, franchise, etc.)
- Geographical scope (Turkey/global authority)
This economic analysis allows for the determination of a preliminary range for the royalty rate.
2. Function – Risk – Asset (FRA) Analysis
This is one of the most important stages of transfer pricing. The activities and risk-bearing levels of the parties are analyzed:
- Who is responsible for R&D activities?
- Who finances brand investments?
- Who bears market, product, financing, and operational risks?
- Who conducts sales and marketing activities?
The party that assumes more functions and risks receives a higher income from the intangible asset fee.
3. Benchmarking
Similar license agreements found in Turkey and international databases are analyzed. Data sources used include platforms such as RoyaltyStat, ktMINE, Orbis, and Bloomberg.
The main criteria considered in the benchmark comparison are:
- Industry
- Rights granted under the agreement
- Royalty application method (net sales / gross sales / per unit fee)
- Agreement term
- Regional usage rights
- Age and innovation level of the technology
General industry ranges (for reference only):
- Brand license: 1% – 5%
- Technology/patent: 3% – 8%
- Software license: 4% – 15%
- Know-how license: 2% – 7%
The final rate must be supported by comparable analysis.
4. Selection of Transfer Pricing Method
Methods used to determine the value of intangible rights according to Turkish and OECD regulations:
Comparable Uncontrolled Price (CUP) Method
This is the most reliable method when comparable data is available.
Transaction Net Margin Method (TNMM)
This method is used especially for distributors selling under a brand in Turkey.
The distributor’s profitability is brought to a reasonable level.
Profit Split Method
Preferred in cases where the technology or brand is jointly developed by both parties.
5. Determining the Royalty Base
Royalty is mostly determined as a percentage of
- net sales,
- and in some cases as a fee per unit.
The most secure method from a tax perspective in Turkey is to apply royalties on net sales.
6. Payment Terms and Contract Structure
Elements that must be included in intellectual property agreements:
- Royalty calculation period (monthly, quarterly, annually)
- Invoice issuance and payment terms
- Minimum guaranteed amount (if any)
- License term, renewal conditions, termination conditions
- Sub-licensing rights, non-competition and confidentiality provisions
7. Tax Compliance in Turkey – The Most Critical Stage
Withholding Tax (Income Tax Law 94/5-b)
The withholding tax rate on intangible rights payments made abroad is 20%.
The rate may be reduced if there are double taxation agreements.
VAT – Reverse Charge
Since the intangible rights service is received from abroad, 20% VAT is calculated in Turkey.
Transfer Pricing Report
It is mandatory for transactions between related parties.
The comparability of the royalty fee must be reported.
Clear technical definition of the contract
The most contentious issue in tax audits is the vague definition of the right in the contract.
How is the Royalty Fee Determined?
- The type of right and economic value are analyzed
- A function-risk-asset analysis is performed
- International comparables are searched
- An appropriate transfer pricing method is selected
- The royalty rate is determined based on industry data
- A reliable royalty base, such as net sales, is decided
- Withholding tax and VAT liabilities in Turkey are calculated
- The contract and transfer pricing report are prepared
If you require expert guidance in determining royalty fees, preparing benchmarking studies, or ensuring full transfer pricing compliance in Turkey, our team at ÖzbekCPA is ready to support you.
Contact us today to discuss your needs.
