Term
Licence agreement
A contract under which an author or rights holder grants permission to use software, a work, a trademark or know-how within an agreed scope, territory and term. It also sets the fee and its taxation, such as withholding tax on payments abroad.
Updated
What it means
A licence agreement is a contract by which a rights holder, such as an author, a software maker or the owner of a trademark, grants another person permission to use their work or right. The licensee does not become the owner but obtains consent to use it within the agreed scope.
The agreement sets the manner of use, territory, term, whether the licence is exclusive or non-exclusive, whether the licensee may sublicense, and the fee. For copyright the requirements are set by the Copyright Act, for industrial property rights by special legislation.
Licences are everywhere in business: software, photos and text on the website, fonts, music played on premises, patents in production or the brand in a franchise. The fee for a licence is called a royalty.
How it works in practice
When commissioning work such as a website, a logo or bespoke software, we recommend dealing with the licence in the contract itself. Without it, a company may find it may use the design or code only to a limited extent and cannot modify it when changing supplier.
In the books, a licence with a long period of use and a higher price is carried as an intangible asset and amortised, while cheaper, short-term licences are expensed. For payments abroad, withholding tax on royalties and VAT self-assessment need checking.
If the company grants a licence, for instance as an author or developer, the income is income from use of a work or business income, taxed according to who receives it. For a foreign recipient the double tax treaty applies.
What to watch out for
The most common mistake is using images, fonts or text from the internet without a licence on the assumption that they are free. Rights holders increasingly search for infringements automatically and send demands for substantial compensation.
Employees and contractors must be distinguished. A work an employee creates as part of their job can usually be used by the employer, but with an external supplier there is no automatic licence without a contract.
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