Withholding Tax on Royalties

Withholding Tax on Royalties

September 19, 2022

High Court Ruling on Withholding Tax on Royalties


Ruling; Distribution and sale of copyrighted material is not subjected to withholding tax. The High Court declared the same after examining the case between Seven Seas Technologies Ltd and KRA. According to the Court, there should be proper distinction between the sale of copyrighted material and the use or exploitation of a copyright when determining which payments qualify as royalties.

Taxpayer Versus KRA Argument

Both the taxpayer and KRA presented the following Arguments to support their case:

High Court Ruling on Witholding Taxes -Tax Payer Vs KRA Arguments

The High Court Findings and Judgement

The Court concluded that the taxpayer was not subject to pay any royalties and in turn not liable to WHT by presenting the following findings to support their decision:

  1. A copyright is transmittable by license and payment of license fees as a consideration of the right to use falls within the definition of a royalty. With this, it is important that the agreement between the parties to spell out the terms of any right to use or reproduce the copyright work.
  2. It also noted that annual subscriptions of licenses do not confirm payment as royalty unless those payment were made to the original creator of the property.
  3. KRA failed to prove that the funds paid to the supplier were royalty so as to attract WHT. The agreement between the software company and the taxpayer did not provide the terms of the license that is whether the license was transferable or restricted for it to be used internally only or for resale without transfer.
  4. The Taxpayer was a distributor who purchased and resold software without the right to tamper or modify it. With this, it was wrong for the tribunal to conclude that by buying and selling the copyrighted material, the taxpayer was commercially exploiting the copyright in the copyrighted material.
  5. The court also found out that the taxpayer paid the license fees but did not acquire any partial rights in copyright and therefore not subject to royalty.
  6. Finally, the OECD Model Tax Convention on Income and on Capital provides that where distributors are paying only for the acquisition of the software copies and do not exploit any rights in the software, the transaction should be dealt with as business profit and not as royalties.


Based on the above case, the judgement is seen as a reprieve to taxpayers that are in the business of software development and distribution. The judgement presented by the court clarifies on the range of software payments that qualify as royalty and therefore subject to WHT.

This gives an opportunity to software companies  to determine if the software they are selling relates to the use or exploitation of a copyright (in this case there will be royalties) or they are purchasing and selling copyrighted materials (in this case they cannot be said to be royalties.)

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