Licensing your trademark: royalties and the contract

A registered trademark is not only a defensive shield: it is an asset that can generate revenue. Granting it under licence allows third parties to use it in exchange for royalties, opening up new markets or channels without direct investment. But a badly drafted licence dilutes the value of the trademark instead of monetising it. Here is how to set it up.

What a trademark licence is

With a licence the owner (licensor) retains ownership of the trademark and grants a third party (licensee) the right to use it for certain products or services, in a defined territory and for a defined period. It is different from an assignment, which transfers ownership definitively: under a licence the trademark remains yours.

The main types:

Exclusive licence: only the licensee may use the trademark within the agreed scope; sometimes not even the licensor.
Simple (non-exclusive) licence: the owner may grant the same trademark to several licensees.
Limited licence: confined to a territory, to specific products/services or to a sales channel.

In Switzerland the licence can be entered in the trademark register at the IPI (Swiss Federal Institute of Intellectual Property): registration is not mandatory for validity between the parties, but it makes the licence enforceable against third parties and is advisable in important transactions.

How royalties are calculated

There is no fixed tariff: the royalty reflects the strength of the trademark, the sector and the breadth of the rights granted. The most commonly used models:

Percentage of turnover generated with the branded products: it is the most widespread formula. The rate varies greatly according to the sector and the fame of the trademark.
Fixed periodic amount (fee), independent of sales.
Mixed model: a guaranteed minimum plus a variable percentage, which protects the licensor even if sales start slowly.
One-off payment on entry, possibly combined with running royalties.

Useful clauses: an annual guaranteed minimum, a precise definition of the calculation base (gross or net turnover, returns excluded) and an audit right to verify the licensee’s statements.

Quality control: the clause that protects the trademark

This is the technically most important aspect. A trademark indicates an origin and a quality standard: if the licensee puts poor-quality products on the market, the trademark loses value for everyone. For this reason the contract must provide for:

binding quality standards on the branded products/services;
control and approval rights over samples, packaging and communication;
usage guidelines (logo, colours, proportions) to maintain consistency;
the right to terminate the contract in the event of improper use or quality deterioration.

Without quality control the licence risks weakening the trademark instead of enhancing it.

Contract clauses not to forget

Subject matter and scope: which trademarks, for which classes of products/services.
Territory and exclusivity: where and to what extent.
Term, renewal and termination, with clear notice periods.
Royalties, reporting and audit.
Ownership and improvements: the trademark remains the licensor’s; the goodwill generated by use accrues to the owner.
Defence of the trademark: who takes action against infringers and how costs and cooperation obligations are shared.
Sub-licences: allowed or prohibited.
Effects of termination: stop of use, disposal of stock, cancellation of the registration.
Applicable law and jurisdiction (typically Swiss).

The tax side

The royalties collected by the licensor are taxable revenue and must be invoiced correctly for VAT purposes (standard rate 8.1%), with attention to the rules on cross-border services when the licensee is abroad. In intra-group relationships (a trademark licensed from one group company to another) the royalty must comply with the arm’s-length principle and be documented: an off-market fee attracts tax challenges. It is worth framing the licence together with the corporate structure and tax planning.

Frequent errors

Verbal or two-line licence, without quality standards or reporting.
No guaranteed minimum: royalties tied only to sales that stay close to zero.
Absence of an audit right, with statements impossible to verify.
Undocumented intra-group royalty, exposed to tax adjustments.
Trademark not registered or not held by the company, which makes the licence fragile.

How SIH ONE supports you

The Tax & Legal division structures licence contracts for trademark-owning SMEs — definition of scope, exclusivity, royalties and quality clauses, registration at the IPI and tax coordination of the royalties, including intra-group and cross-border. If you want to turn your trademark into a protected source of revenue, let’s set up the right licence together.