And again about royalties, license agreement, rights to use IP objects online, online services and VAT

Determination of royalties according to the PKU

14.1.225. royalty - any payment, including a payment paid by the user of copyright objects and (or) related rights in favor of collective management organizations, in accordance with the Law of Ukraine "On effective management of property rights of copyright holders in the field of copyright and (or ) related rights", received as a reward for using or granting the right to use an object of intellectual property rights, namely any literary works, works of art or science, including computer programs, other records on media, video - or audio cassettes, cinematographic films or tapes for radio or television broadcasting, broadcasts (programs) of broadcasting organizations, other audiovisual works, any rights protected by a patent, any registered trademarks (marks for goods and services), rights intellectual property rights to a design, secret drawing, model, formula, process, intellectual property rights to information regarding industrial, commercial or scientific experience (know-how) (subclause 14.1.225 of clause 14.1 of Article 14 of the PKU).

Royalty payments received are not considered:

as a reward for the use of a computer program, if the conditions of use are limited to the functional purpose of such program and its reproduction is limited to the number of copies necessary for such use ("end consumer" use);

for the purchase of copies (copies, instances) of intellectual property objects, including in electronic form, for use according to their functional purpose for final consumption or for the resale of such a copy (copy, instance);

for the acquisition of things (including information carriers) in which the objects of intellectual property rights defined in the first paragraph of this subsection are embodied or on which are contained, for the use, possession and/or disposal of a person;

for the transfer of rights to objects of intellectual property rights, if the terms of the transfer of rights to the object of intellectual property rights grant the right to the person who receives such rights to sell or alienate in another way intellectual property rights or to publish (disclose) secret drawings, models , formulas, processes, intellectual property rights to information about industrial, commercial or scientific experience (know-how), except for cases when such publication (disclosure) is mandatory according to the legislation of Ukraine;

for the transfer of the right to distribute copies of software products without the right to reproduce them or if their reproduction is limited to end-user use;

Definition of electronic services according to the PKU

14.1.56-5. electronic services - services that are provided via the Internet, automatically, with the help of information technologies and mainly without human intervention, including by installing a special application or application on smartphones, tablets, television receivers or other digital devices. Such services include, in particular, but not exclusively:

a) supply of electronic copies, provision of access to images, texts and information, including, but not limited to, subscription to electronic newspapers, magazines, books, provision of access and/or uploading of photos, graphic images, video materials;

b) providing access to databases, including the use of search engines and directory services on the Internet;

c) supply of electronic copies (electronic-digital information) and/or provision of access to audiovisual works, video and audio works to order, games, including supply of services for participation in such games, supply of services for access to television programs (channels) or their packages, except for access to television programs simultaneously with their broadcast through the television network;

d) providing access to informational, commercial, entertainment electronic resources and other similar resources, in particular, but not exclusively, placed on platforms for sharing information or video materials;

e) provision of distance learning services on the Internet, the implementation and provision of which does not require human participation, including by providing access to virtual classes, educational resources in which students perform tasks online, and grades are assigned automatically, without human participation (or with minimal her participation);

e) providing a cloud service in terms of providing computing resources, storage resources or electronic communication systems using cloud computing technologies;

e) supply of software and updates to it, including electronic copies, provision of access to them, as well as remote maintenance of software and electronic equipment;

g) providing advertising services on the Internet, mobile applications and other electronic resources, providing advertising space, including by placing banner advertising messages on websites, web pages or web portals.

Art. 1109 of the Civil Code of Ukraine defines:

Under the license agreement, one party (the licensor) grants the other party (the licensee) permission to use the object of intellectual property rights in a specified way (ways) for a certain period of time in a certain territory, and the licensee undertakes to pay a fee for the use of the object, if otherwise not established by the contract.

However, the Law of Ukraine "On Copyright and Related Rights" specifies that the use of a work by any person is allowed only on the basis of an author's contract. In the context of this norm, the author's contract has a similar essence to the license contract, with the only difference that the parties are not defined as the licensor and the licensee, and the permission to use the work is not assigned the name "license".

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If using the program online, access to databases, images, videos is not considered royalty, then what is the essence of payments from these intellectual property objects?

According to the Tax Code, everything that is not a product is a service, and services are subject to VAT in general.
That is, if you look at the essence of things, then:

Royalties are essentially passive income when an object of intellectual property is created and it brings income to its creator, author, owner until the moment of alienation;
Services are activities that involve the active participation of their subjects, i.e. providers, in the process of provision.

The Tax Service has taken a traditionally fiscal position and considers the provision of online access to images, texts, databases, programs, etc. to users as services.

To try to theoretically connect this logic to the Tax Code, there are only two arguments:

first of all, it is the fact that providing access to online text image database programs still involves creating a copy of this image upon the occurrence of a certain event, for example, payment and
secondly, online systems require constant support, which implies the activity of the service provider.

In order to distinguish what exactly you provide under your civil law contract, you need to answer a number of questions for yourself:

is the active involvement of the author, the owner of exclusive rights, in granting the rights to use the object of intellectual property?
Is online access to the object of intellectual property provided?
Does the recipient of intellectual property rights actively use them to meet his needs or does he obtain the authority of the owner of intellectual property rights to further distribute them?
What is the greater tax burden arising from a civil law contract: a) if we consider the provision of intellectual property rights for royalties or if we consider them as online services?

There is a fine line:

A) the author creates objects of intellectual property, transfers the rights to use intellectual property rights, if such activity is considered services, then the tax authority can take an even more fiscal position and consider such activity as the provision of the actual objects of intellectual property rights for the purpose of receiving royalties, justifying it is as follows:

this is passive income
there are no types of activities that involve the provision of such services
moreover, the author can only be a natural person, and not a sole proprietorship or a legal entity that receives intellectual property rights as a result of a contract for the creation of an official work or the creation of a commissioned work.

The consequence of this may be before the accrual of tax liabilities and the need to pay instead of 5% - 19.5%.

For example:

The author creates images and transfers them under the license agreement to the licensee, and the licensee uses such images in his business activities. Images are sent by e-mail in electronic format. In the format of the Ukrainian legal field, such activity of the author is considered the provision of intellectual property rights for royalties and is essentially passive income, therefore it is taxed at a rate of 19.5%.
If the marketplace enables users to download images created by authors for their private or business activities, such activities of the marketplace will be considered online services and subject to VAT.

When deciding on the qualifications for granting the right to use intellectual property objects, it is necessary to take into account a lot of nuances that are not fully disclosed in this article. Therefore, it is recommended to seek advice from a specialized specialist.

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Transfer of rights to use the object of intellectual property rights

Date of publication: 17.01.2024