How to Structure Licensing Revenue in a Private Limited Company

How to Structure Licensing Revenue in a Private Limited Company

💰 Introduction: Understanding Licensing Revenue

In today's dynamic economy, intellectual property (IP) has emerged as one of the most significant intangible assets for businesses. Licensing revenue, which is earned through granting rights to use these assets to other entities, has grown into a critical component of monetization strategies for many private limited companies in India. This revenue model allows companies to leverage their intellectual property such as trademarks, software, patents, designs, and copyrighted content without directly engaging in manufacturing or service delivery.

For a private limited company, structuring licensing revenue involves not only legal compliance but also accounting accuracy, tax planning, and strategic corporate governance. The nature of the asset being licensed, duration, jurisdiction, licensing agreement terms, and applicable taxes significantly impact how the licensing revenue should be structured.


👥 Legal Framework: Licensing and Indian Corporate Law

Under the Indian Companies Act, 2013, a private limited company has the legal capacity to enter into licensing agreements. These agreements must be documented properly to withstand legal scrutiny. Furthermore, IP licensing in India is governed by several statutes such as:

Licensing can be exclusive or non-exclusive, perpetual or for a limited duration, royalty-bearing or royalty-free. Each form influences the accounting treatment and taxation of licensing revenue.


📆 Types of Licensing Agreements and Their Implications

A licensing agreement is a legally binding contract between two parties, where one party (licensor) grants the other (licensee) the rights to use a specific intellectual property. Types of licensing agreements include:

Each licensing type has unique revenue characteristics. For instance, software licensing often involves annual fees or subscriptions, while trademark or patent licensing might be structured as a one-time fee plus royalties.


📊 Accounting Treatment of Licensing Revenue

As per the Indian Accounting Standards (Ind AS), particularly Ind AS 115 (Revenue from Contracts with Customers), the recognition of licensing revenue depends on the nature of the license:

For example, if the licensing agreement allows the licensee to access and use software over a period, the revenue is recognized over the term of the agreement. Companies must assess the performance obligations and allocation of transaction price as per Ind AS 115.


📑 Licensing Revenue in the Books of Account

A private limited company must maintain books of accounts that reflect all income, including licensing revenue, in accordance with the Companies Act, 2013 and the applicable accounting standards. The licensing revenue is typically shown under "Operating Revenue" if it constitutes the core business or "Other Income" if incidental.

The chart of accounts should reflect different licensing categories such as:


🌐 GST Implications on Licensing Revenue

Under the Goods and Services Tax (GST) regime, licensing is generally considered a supply of service. The applicable GST rate depends on the nature of the license:

GST must be charged on the invoice raised for the license fee or royalty. If the license is granted to an overseas entity, it may qualify as an export of service, provided conditions are met (such as receipt in convertible foreign exchange), and hence, it may be zero-rated.


🌟 Royalty vs Licensing Income: Key Distinctions

While often used interchangeably, royalties and licensing income can be treated differently in some cases. Royalties generally refer to payments made periodically based on usage or performance metrics (e.g., number of units sold). Licensing income can be broader, including fixed fees, minimum guarantees, and milestone-based payments.

From a tax and reporting perspective, separating royalty and license fee heads improves clarity and compliance.


📝 Structuring a Licensing Agreement: Key Clauses

A well-drafted licensing agreement should include:

Clear clauses reduce the risk of litigation and also aid in proper tax planning.


💼 Taxation of Licensing Revenue in India

Licensing revenue earned by a private limited company is taxable under the head "Profits and Gains from Business or Profession." Effective tax planning strategies include:

Advance tax provisions must also be adhered to, depending on expected licensing income.


📣 Foreign Licensing: FEMA and RBI Compliance

When a private limited company licenses its IP to a foreign entity, the Foreign Exchange Management Act (FEMA) provisions apply. The key compliances include:

All such revenues must be repatriated within the timeframes prescribed by RBI.


🔒 Protecting Intellectual Property While Licensing

While licensing can be highly profitable, it exposes your intellectual property to misuse. Key protection mechanisms include:

A private limited company must regularly update and enforce its IP portfolio to maintain legal strength and value.


💳 Valuation of Licensing Agreements

For internal accounting, fundraising, or legal purposes, licensing agreements may need to be valued. Valuation methods include:

Valuation is also critical in case of M&A, inbound investment, or IP transfers.


✅ Conclusion: Strategic Recommendations

Structuring licensing revenue in a private limited company involves a multi-disciplinary approach. Companies must balance legal, accounting, and tax considerations with business strategy. A few strategic takeaways include:

When done correctly, licensing can become a sustainable revenue stream with minimal operational burden.



Created & Posted by Himanshu Shakya
Account Executive at TAXAJ

TAXAJ is a consortium of CA, CS, Advocates & Professionals from specific fields to provide you a One Stop Solution for all your Business, Financial, Taxation & Legal Matters under One Roof. Some of them are: Launch Your Start-Up Company/Business, Trademark & Brand Registration, Digital Marketing, E-Stamp Paper Online, Closure of Business, Legal Services, Payroll Services, etc. For any further queries related to this or anything else visit TAXAJ

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