Royalties: definition, types, rates, and how they work

Published Tuesday 6 October 2026

Table of contents

• What is a royalty?
• Types of royalty payments
• How royalty payments work
• Factors affecting royalty rates
• Understanding royalty agreements
• Tax implications of royalties for business
• Manage royalty payments with Xero
• FAQs on royalties

Key takeaways

• Establish clear royalty agreements that define payment terms, usage rights, duration and audit provisions to protect both parties and prevent disputes
• Choose the royalty structure that suits your situation: percentage of revenue for ongoing income, fixed fees per unit for predictable costs, or usage-based payments for variable use
• Track and document every royalty transaction, including sales data, payment calculations and reporting schedules, to keep things transparent between licensors and licensees
• Consider tax early in negotiations, especially for overseas deals where Singapore's 10% withholding tax or a lower treaty rate changes the amounts paid and received

What is a royalty?

A royalty is a recurring payment to the owner of an asset, usually intellectual property, for the right to use it. It's typically a percentage of revenue or a fixed amount per unit sold.

A licence gives the user partial rights to the asset while the owner keeps ownership. The Inland Revenue Authority of Singapore (IRAS) draws the same line for copyright: licensing partial rights is a royalty, while selling the copyright outright is a sale.

Every royalty arrangement involves two parties:

• Licensor: the asset owner who receives the royalty payment
• Licensee: the party who pays for permission to use the asset

Royalty agreements are common in industries built on intangible assets, such as:

• music and entertainment
• publishing
• technology and software
• franchising

You'll find royalties in plenty of everyday Singapore businesses. Here are some examples of how they work:

• a café franchisee pays a monthly royalty to its franchisor for the brand and recipes
• a local designer licenses artwork to a merchandise brand and earns a cut of each sale
• a software developer licenses code to a distributor in exchange for a fee per copy
• a songwriter earns royalties each time a song is streamed

Types of royalty payments

Royalty payments fall into three main categories based on the asset being licensed and how it's used. Understanding which type applies to your situation helps you structure agreements and plan for costs.

Here are the three most common types.

Franchise royalties

Franchise royalties are payments franchisees make to franchisors for the right to use an established business model. These payments cover access to branding, intellectual property and operational systems.

Franchise royalties typically work in one of two ways:

• Percentage of revenue: a set percentage of gross or net sales paid regularly. For franchises, the typical royalty fee is 4%–12% of gross revenue.
• Flat fees: a fixed amount paid regardless of revenue performance

The franchise model is common in food and beverage. A café or bubble tea outlet, for example, pays royalties for the right to trade under an established brand.

Learn more about franchises.

Intellectual property royalties

Intellectual property (IP) royalties are payments for the right to use or sell protected assets. These assets include patents, trademarks and copyrighted works.

IP royalties are common across several industries:

• Technology and manufacturing: licensing patented software or processes
• Publishing: authors earning royalties from book sales
• Music and film: creators receiving payments for use of their works

For example, a tech company might license patented software from an inventor. An author might license a manuscript to a publisher and earn royalties on each copy sold.

Licensing royalties for creative works

Licensing royalties for creative works are payments for using music, films, artwork or writing in a new context. Creators license the work for specific uses and keep ownership.

Common licensing scenarios include:

• Advertising: a song licensed for a TV commercial
• Publishing: illustrations licensed for a children's book
• Product design: artwork licensed for merchandise

These arrangements let creators retain ownership while earning ongoing income from their work.

How royalty payments work

When you arrange royalties, the process follows a predictable cycle, starting with agreeing terms and ending with payment. Understanding each step helps you manage cash flow, keep accurate records and build strong working relationships with licensors or licensees.

Here's how a typical royalty arrangement works in practice.

1. Establish a royalty agreement

To arrange royalties, start by negotiating and drafting a formal licence. A strong contract outlines the asset being licensed, how it can be used and the structure of royalty payments.

Consider these strategies when negotiating:

• Include a performance-based termination clause: Protect yourself if the asset doesn't generate expected revenue.
• Specify geographic and usage scope: Define the countries, regions and domains (online or offline) where rights apply.
• Clarify exclusivity terms: Determine whether others can license the same asset, and adjust terms accordingly.
• Set how long the arrangement lasts: Balance stability (longer deals) against flexibility to renegotiate (shorter deals).

2. Define the payment terms

Set out exactly how you'll calculate royalty payments and when you'll pay them. Most royalty structures fall into one of three categories:

• Percentage of revenue: the licensee pays a set percentage of sales (for example, a franchisee paying 5% of net sales)
• Fixed fee per unit: a set amount per item sold (for example, an author receiving S$5 per ebook)
• Usage-based: payment each time the asset is used (for example, a musician earning royalties per stream)

If you're the licensor, consider payment timing alongside the amount. Royalties you've earned but haven't yet received sit in accounts receivable, so shorter payment terms mean money reaches your bank sooner.

3. Track your usage or sales

The licensee must track and report royalty-related transactions. This includes recording how much revenue the asset generates and reporting to the licensor on an agreed schedule.

Key tracking responsibilities include:

• Recording revenue: Document sales, usage or other metrics that determine royalty amounts.
• Reporting regularly: Submit reports monthly, quarterly or as specified in the contract.
• Providing transparency: Share enough detail so the licensor understands how you calculated the figures.

Accurate reporting builds trust and maintains a strong working relationship between both parties.

4. Calculate your payments

The licensee calculates the royalties they owe based on the payment structure and contract terms you agreed. Several factors can affect the final amount:

• Minimum guarantees: A set amount paid to the licensor regardless of performance.
• Advances: Upfront payments recouped from future royalties.
• Deductions: Adjustments for returns, refunds or other agreed expenses.
• Escalators: Higher royalty rates triggered after reaching sales or revenue thresholds.

Review your contract carefully to make sure you include all applicable factors in each calculation.

5. Make payments

The licensee pays the royalty according to the agreed schedule. Until then, the amount owed sits in the licensee's accounts payable, and clear documentation gives both parties records for accounting and tax.

Payment documentation options include:

• Royalty statement: The licensee issues a statement detailing the calculation and amount paid.
• Invoice request: The licensee asks the licensor to raise an invoice for the payment amount.

Use one of Xero's free invoice templates.

6. Auditing and compliance

Most royalty contracts include audit rights that let the licensor review the licensee's records. This confirms payments are accurate and builds confidence in the arrangement.

Audits typically cover:

• Sales and usage records: Verifying the data used to calculate royalties.
• Payment accuracy: Confirming amounts match the agreed terms.
• Contract compliance: Checking that usage stays within licensed scope.

Include clear audit terms in your contract, specifying how often audits can occur and who bears the cost.

Factors affecting royalty rates

Royalty rates depend on commercial, contractual and market factors that vary by industry and context. Understanding these factors helps you negotiate fair terms whether you're paying or receiving royalties.

Key factors that influence royalty rates include:

• Industry standards: Fast-food franchises may have rates around 5%, while business services franchises charge an average of nearly 12%.
• Asset value: Higher-value assets command higher royalty rates.
• Negotiating power: Well-known creators often secure better terms, while licensees with strong distribution and proven sales gain bargaining power.
• Exclusivity: Licensees pay premiums for exclusive rights or non-compete clauses.
• Market demand: High-demand assets support higher rates.

Understanding royalty agreements

A royalty agreement is a legally binding contract that defines how you license an asset. The terms must be clear, transparent and enforceable so both parties understand their obligations and what happens if either party doesn't meet them.

Whether you're the licensor or licensee, invest time upfront to get the contract right. A well-drafted contract should cover:

• the asset being licensed and permitted uses
• royalty rates and payment schedules
• duration and termination conditions
• audit rights and dispute resolution

Get legal advice

Both parties should ask a lawyer to review the contract before signing. Legal review has a different purpose depending on your role:

• For licensees (typically drafting the agreement): Check the contract is legally compliant and accurately reflects the negotiated terms.
• For licensors: Confirm that the contract clearly sets out your rights, payment terms and protections, and that they're enforceable.

Paying for legal advice upfront helps you avoid costly disputes later.

Tax implications of royalties for business

Royalties are taxable income for licensors and typically tax-deductible costs for licensees. Both parties must account for royalties properly and reflect them in tax returns.

Here's how royalties affect each party:

• Licensors (receiving royalties): Report royalty income on your tax return and pay applicable taxes.
• Licensees (paying royalties): Claim royalty payments as a tax-deductible business expense.

If you pay a large upfront fee for a multi-year licence, you may record it as an asset and spread the cost through amortisation. How tax applies depends on your circumstances, so ask a tax professional for guidance.

International tax considerations

Paying royalties to an overseas licensor brings in two more tax factors: withholding tax and Avoidance of Double Taxation Agreements (DTAs). Knowing both helps you budget for the right amounts and pay tax in the right place.

Withholding tax

When your business pays royalties to a non-resident, you keep back part of the payment and send it to IRAS. The rate is 10% or the reduced DTA rate, depending on where the licensor is based.

IRAS publishes the withholding tax rates for each payment type. As the payer, you file and pay by the 15th of the second month after the payment date. Paying late adds a 5% penalty.

Say your café pays S$10,000 in royalties to an overseas franchisor at the 10% rate. You'd pay S$9,000 to the franchisor and S$1,000 to IRAS.

Double tax agreements

Licensors receiving royalties from Singapore could otherwise pay tax on the same income in two countries. Singapore's DTAs share taxing rights between the two countries and often set a lower withholding rate.

Under the Singapore–Malaysia DTA, the rate falls to 8%, according to PwC's Singapore tax summary. That covers royalties such as payments for patents, trademarks, designs, secret formulas or processes. The same summary notes the 10% withholding is a final tax for non-residents with no business or permanent establishment in Singapore.

Tips to stay compliant

Here are some tips to help you stay compliant while getting the most out of your royalty arrangement:

• Keep detailed records: Document all royalty payments, dates and signed agreements.
• Consider tax early: Factor taxes in when you negotiate royalty rates and payment terms.
• Consult a tax professional: Get expert advice when licensing across borders or dealing with an unfamiliar tax system.

Learn more about withholding tax and other tax deductions.

Manage royalty payments with Xero

Whether you're paying or receiving royalties, you can stay organised and in control with Xero. Track every payment, keep clear records and simplify tax time.

With Xero, you can:

• create and track invoices for royalty payments
• monitor incoming and outgoing cash flow in real time
• keep organised records for tax compliance and audits

Take control of your business finances and get one month free.

FAQs on royalties

Here are answers to common questions about royalties in business.

What is the meaning of royalties?

Royalties are payments an asset owner receives in exchange for permission to use their property. You typically calculate these payments as a percentage of revenue or a fixed fee per unit sold.

Who is entitled to royalties?

The licensor (asset owner) is entitled to receive royalties. This includes creators of intellectual property, franchise owners and anyone who licenses their assets to others for commercial use.

Are royalties considered income?

Yes, royalties count as taxable income for the recipient (licensor). How tax applies depends on your circumstances, so ask a tax professional what you must report.

How are royalty payments calculated?

You typically calculate royalty payments using one of three methods: a percentage of revenue, a fixed fee per unit sold, or a usage-based fee (such as per stream or per download). The royalty contract specifies how to calculate payments.

What's the difference between a royalty and a licence fee?

A licence fee is typically a one-time upfront payment to use an asset, while royalties are ongoing payments based on usage or sales. Many agreements combine both: an upfront licence fee plus ongoing royalties.

Do I need to withhold tax when paying royalties to an overseas company?

Yes, you generally withhold 10%, or the lower DTA rate, and pay it to IRAS. You still file the payment with IRAS even when a DTA exempts it in full.

What is a royalty advance?

A royalty advance is an upfront payment from the licensee to the licensor before any royalties are earned. The licensee recoups it from future royalties, so the licensor receives more only once earnings pass the advance amount.

How do I record royalties in my accounts?

Licensors record royalties as income, with unpaid amounts in accounts receivable, while licensees record an expense, with amounts owed in accounts payable. A capitalised licence may be treated as an intangible asset and amortised over its term.