UK–UAE Royalty Rates: How Should You Set the Rate?

UK–UAE Royalty Rates: How Should You Set the Rate?

A UK company is using a brand owned by its UAE group company.

The group wants a royalty arrangement, but there is an obvious question:

Should the royalty be 5%, 10%, 15% — or something else?

There is no universal percentage that applies to every UK–UAE royalty arrangement.

The appropriate pricing depends on the IP, rights being licensed, commercial circumstances, functions performed and risks borne by the parties, together with the transfer-pricing rules that apply to the particular transaction.

So the starting point should not be:

"What percentage gives us the best tax result?"

It should be:

"What pricing would make commercial sense for this particular licence between independent parties?"

That is the starting point for an arm's-length analysis.

Why There Is No Standard Royalty Percentage

Two businesses can both license trade marks and legitimately arrive at very different commercial arrangements.

Consider the difference between:

• a globally recognised brand and a newly established brand;

• an exclusive licence and a non-exclusive licence;

• UK-only rights and worldwide rights;

• one product category and an entire business;

• a brand that drives customer demand and one that provides only limited commercial benefit.

The percentage therefore cannot be selected in isolation.

Even a royalty expressed as a percentage of sales is only one possible way of pricing the transaction.

HMRC notes that royalties are often calculated as a percentage of sales, but also recognises that a fixed percentage can be inappropriate where the economic benefits or costs of using the intangible are uncertain. Different arrangements, including variable or stepped payments, may sometimes be more appropriate. GOV.UK

So the objective is not to find the royalty percentage.

It is to establish a pricing approach that makes sense for the actual transaction.

When Does UK Transfer Pricing Apply?

This is an important qualification.

A UK company paying a UAE group company may be dealing with a connected-party transaction, but you should not assume that every connected-party royalty automatically receives exactly the same UK transfer-pricing treatment.

The UK transfer-pricing rules apply where their statutory conditions are met.

HMRC explains that the basic rule can require taxable profits or losses to be calculated using an arm's-length provision instead of the actual provision where the relevant conditions are satisfied, including the basic pre-condition and a potential UK tax advantage. GOV.UK

So the correct approach is:

First: establish whether the UK transfer-pricing rules apply to the particular arrangement.

Then: determine what an arm's-length provision would look like.

That distinction matters.

It is more accurate than simply saying:

"It's a group company, so transfer pricing automatically determines the royalty."

What Does an Arm's-Length Royalty Look At?

The arm's-length principle asks what independent parties would have agreed in comparable circumstances. GOV.UK

For a royalty, that means looking beyond the percentage.

1. What IP Is Being Licensed?

A trade mark, patent, software or know-how can have very different economic characteristics.

You need to understand what the UK company is actually receiving the right to use.

HMRC specifically emphasises examining what the licensee receives in return for the royalty and whether an independent business would actually pay for that property. GOV.UK

2. What Rights Does the Licence Grant?

The licence could be:

• exclusive or non-exclusive;

• limited to the UK or wider territories;

• restricted to particular products;

• limited in duration;

• subject to particular distribution or usage conditions.

Those differences can materially affect the commercial value of the licence.

3. What Functions Are Being Performed?

Legal ownership of the IP does not tell the entire story.

Consider:

• who developed the IP;

• who maintains it;

• who protects it;

• who makes strategic decisions;

• who performs marketing activities;

• who bears relevant risks.

HMRC specifically warns that a UK business may have contributed to the value of an intangible even where another connected company legally owns it. GOV.UK

That can be particularly important with trade marks.

If the UK company is doing substantial work that creates or enhances the brand's value in the UK, simply applying a royalty to all UK sales may not tell the complete story.

4. What Benefit Does the UK Company Receive?

The UK company is paying for commercial rights.

So ask:

What does those rights actually contribute to the UK business?

For example, does the IP:

• attract customers?

• support premium pricing?

• increase sales?

• provide access to an established market?

• reduce the cost of developing a new brand?

The answer helps establish the economic value of the licence.

How Can You Support the Pricing?

A royalty rate becomes much easier to understand when there is evidence behind it.

Depending on the facts, useful evidence may include:

Comparable licensing arrangements

Third-party licensing agreements can provide useful evidence where they are sufficiently comparable.

But a percentage from another business should not simply be copied.

The underlying circumstances need to be comparable.

Valuation analysis

Where the IP is particularly valuable or difficult to benchmark, a valuation may help assess the economic contribution of the intangible.

Commercial analysis

Document why the licence exists, what rights are being provided and how the parties benefit.

Financial analysis

Look at the economics of the arrangement.

What does the UK company earn before and after the royalty?

What return remains for the UAE company?

Would independent parties consider the resulting allocation commercially reasonable?

HMRC's royalty guidance specifically says the analysis should consider how the intangible has been valued and whether both parties benefit appropriately from the arrangement. GOV.UK

What About the Royalty Agreement?

A written agreement is important, but it is not the whole analysis.

The contract should clearly establish:

• what IP is being licensed;

• the rights granted;

• the territory;

• duration;

• exclusivity;

• payment mechanism;

• reporting requirements;

• termination rights.

But a contract saying:

"The royalty is 10%."

does not, by itself, explain why 10% was commercially appropriate.

The pricing analysis should sit behind the agreement.

And the actual business should operate consistently with it.

What If the Royalty Is Too High?

An unsupported royalty can create several issues.

The UK company may be claiming a deduction for the payment, while the connected UAE company receives the corresponding income.

Where the UK transfer-pricing rules apply and the actual provision gives rise to a UK tax advantage compared with an arm's-length provision, the rules can require the taxable result to be adjusted to the arm's-length position. GOV.UK

There is also a specific provision in Article 12 of the UK–UAE tax treaty.

Where a special relationship causes the royalty to exceed the amount that would have been agreed between the parties without that relationship, the treaty's royalty treatment applies only to the arm's-length amount; the excess can remain subject to the domestic laws of the two countries. GOV.UK

That does not mean there is one predetermined percentage that HMRC or the treaty considers "correct."

It means the facts and commercial terms matter.

A Practical Example

Suppose a UAE company owns a trade mark and licenses it to its UK group company.

The UK company pays a royalty based on UK sales.

The group initially considers 12%.

Before adopting that figure, it reviews:

• the brand's commercial value;

• the rights being granted;

• comparable licensing evidence;

• the UK company's functions;

• marketing activity;

• expected economic benefit;

• the resulting returns to both companies.

The analysis may support the proposed rate.

Or it may suggest that a different pricing mechanism is more appropriate.

The important point is that the percentage comes out of the analysis — it does not replace the analysis.

Common Mistakes

Choosing the rate first

Starting with "10% sounds normal" and looking for support afterwards is backwards.

Copying another company's percentage

Another business may have different IP, markets, rights and commercial circumstances.

Assuming every connected royalty has the same transfer-pricing treatment

The UK rules contain specific conditions, so the particular transaction needs to be assessed.

Looking only at the legal owner

The economic contribution of each party matters.

Treating the licence agreement as sufficient evidence

The agreement establishes the terms. It does not necessarily establish why those terms are arm's length.

Setting the rate purely to move profit

The tax result should follow the commercial analysis, not determine it.

UK–UAE Royalty Rate Checklist

Before implementing the arrangement, check:

• What IP is being licensed?

• Who legally owns it?

• What rights does the UK company receive?

• Is the licence exclusive?

• What territory does it cover?

• Who performs the important IP-related functions?

• What commercial benefit does the UK company receive?

• What comparable evidence exists?

• Would independent parties have entered into the arrangement?

• Do the UK transfer-pricing rules apply to this transaction?

• Is the pricing analysis documented?

• Does the actual business operate consistently with the agreement?

How EvolveTax Can Help

A UK–UAE royalty structure is not simply a matter of choosing a percentage.

The analysis can involve IP ownership, commercial value, licensing rights, UK transfer pricing, treaty considerations and supporting evidence.

EvolveTax can help UK founders assess the structure, understand the relevant UK–UAE tax considerations and build the analysis behind the royalty arrangement.

The objective is not to find a percentage that sounds normal.

It is to establish a pricing position that is commercially reasoned, properly supported and consistent with the actual arrangement.

Frequently Asked Questions

1. Is there a standard UK–UAE royalty rate?

No. There is no universal percentage that applies to every UK–UAE royalty arrangement.

The appropriate pricing depends on the particular IP, rights, functions, risks, market and commercial circumstances.

2. Can a UK company simply choose a 10% royalty?

A percentage can be agreed commercially, but where the UK transfer-pricing rules apply, the relevant conditions and arm's-length position need to be considered. GOV.UK

3. Does every connected-party royalty automatically have to be adjusted under UK transfer pricing?

No. The UK transfer-pricing rules contain specific statutory conditions. Whether they apply needs to be assessed based on the particular transaction and circumstances. GOV.UK

4. Is a royalty agreement enough to support the rate?

Not necessarily. The agreement is important, but the commercial reasoning and supporting evidence behind the pricing also matter.

5. Can the royalty be a percentage of sales?

It can be, and HMRC notes that royalties are often structured this way. But a percentage of sales is not automatically appropriate for every intangible or commercial arrangement. GOV.UK

The Key Point

There is no magic 5%, 10% or 15% royalty rate for UK–UAE structures.

The rate needs to be considered in the context of the actual IP, rights granted, commercial benefits, functions, risks and applicable transfer-pricing rules.

And importantly, the existence of connected companies does not mean that every royalty transaction automatically receives an identical UK transfer-pricing treatment.

The better starting point is:

What would independent parties have considered for this particular licence, and what evidence supports that analysis?

The percentage is the result of that work — not the starting point.