India's Supreme Court Says a Distribution Licence Isn't a Royalty. How Yours Is Drafted Decides Whether It Is.

Game licence fees paid across borders are taxed at source before the money lands: 20% in India and Indonesia, 25% in the Philippines, 15% in Saudi Arabia. What your contract actually grants decides whether that tax applies at all, and India's Supreme Court has already ruled on where the line sits.

The invoice says $18,000. The payment advice says $14,068.80. Nobody short-paid you and there is nothing to dispute. India's revenue authority took its cut on the way out, at 21.84%, and your licensee had no discretion in the matter.

It catches the buy side just as hard from the other direction. A portal operator in Jakarta budgets $18,000 for a catalogue, then finds the licensor's contract makes that a net figure. The real cost is $22,500. Both parties signed the same number. Neither priced the tax.

💸 The Fee You Agreed Is a Gross Number

Withholding at source is ordinary machinery, not an exotic risk. When a business in one country pays a licence fee to a company in another, the payer's own tax law usually requires it to deduct a percentage and remit that to its revenue authority before the balance ever leaves the country. The payer carries the legal obligation. If it under-deducts, the penalty and the interest land on the payer, not on you.

That asymmetry explains behaviour that otherwise looks unreasonable. Licensees deduct first and discuss it afterwards, because a finance director in Manila or Riyadh is not going to take personal exposure on your assurance that no tax is due. "Just don't withhold and we'll sort it out later" is never on offer, and asking for it marks you as someone who has not done this before.

For game licensing this bites hardest in exactly the markets carrying the growth: telecom operators, portal owners and publishers in India, Indonesia, Vietnam, the Philippines, Brazil and Saudi Arabia. The licence fee, the minimum guarantee and the revenue share can all be caught. So can a source-code deal, depending on how it is written.

📜 Royalty or Sale: The Line India's Supreme Court Drew

Here is the part almost nobody checks before signing: withholding on royalties applies to royalties. If a payment is instead the business profits of a non-resident with no permanent establishment in the country, the business profits article of most treaties gives the source country nothing at all. Characterisation is not a detail. It is the entire difference between 0% and 21.84%.

India litigated this for two decades and settled it on 2 March 2021. In Engineering Analysis Centre of Excellence v. CIT, the Supreme Court held that amounts paid by resident Indian end users and distributors to non-resident software suppliers, under end-user licence agreements or distribution agreements, are not royalty payments and attract no withholding under section 195.

The reasoning is what matters to anyone drafting a game licence. The court looked at what the agreements actually granted: a non-exclusive, non-transferable licence to resell the software, with no copyright in the program transferred to the distributor or the end user, and no right to sub-license or further transfer. Payment for a copy of a copyrighted work is not payment for the copyright in it.

What tips a game licence into royalty territory

• Reproduction rights. The right to make copies of the build. Almost every bulk catalogue licence grants this explicitly, because you host the files yourself.
• Modification and adaptation rights. Reskin permissions, localisation permissions, source code you are allowed to alter. That is the exercise of a copyright, not the use of a copy.
• Sublicensing. The moment your white-label customers can redistribute the titles, you are handling copyright rather than consuming a product.
• Revenue share. A percentage of what the games earn reads as a royalty to any revenue authority on the planet, whatever the contract heading says.
• Instalments on a "purchase". A perpetual buy paid over eighteen months looks a great deal like recurring royalty.

Read your own catalogue agreement against that list honestly. A standard HTML5 catalogue deal — you host the builds, you reskin the loading screen, you sublicense to a carrier portal — is a royalty on most readings, and the Engineering Analysis facts will not rescue it. A flat one-off for a finished build you embed unchanged sits much closer to the case the court actually decided.

Two caveats worth stating plainly. That judgment is Indian law read against Indian treaties; other jurisdictions characterise software and digital content differently, and some define royalty in domestic law more broadly than their treaties do. And India replaced the Income-tax Act, 1961 with the Income-tax Act, 2025, in force from 1 April 2026 — largely a restructuring rather than a rate change, but it means every contract citing "section 195" now cites a repealed statute. Fix that language at renewal.

🌍 The Statutory Rates, Side by Side

Domestic rates on royalties paid to non-residents, from PwC's Worldwide Tax Summaries:

• India — 20%, doubled from 10% by the Finance Act 2023 with effect from the year beginning 1 April 2023, then increased by a surcharge of 2% or 5% and a 4% health and education cess. The effective rate runs roughly 20.8% to 21.84%.
• Indonesia — 20% under Article 26. Treaties commonly cut this to 10–15%, but without a valid Certificate of Domicile the rate is 20%, full stop.
• Philippines — 25% final withholding on royalties to non-resident foreign corporations. Treaty rates are typically 10–15%.
• Saudi Arabia — 15% on royalties, payable within the first ten days of the month after the payment is made. Treaty rates run from 0% to 10% depending on the counterparty and the type of royalty.
• Vietnam — 10% as the corporate income tax leg of foreign contractor tax. Software products and services and transfers of IP rights are VAT-exempt, so the VAT component that catches other cross-border services does not apply here.
• Brazil — 15% generally, rising to 25% where the recipient sits in a jurisdiction Brazil treats as a tax haven. Other transactional taxes apply to remittances on top.

The spread is 10% to 25% on an identical commercial transaction. And note Vietnam, because it is the case nobody anticipates: the domestic 10% is lower than several of Vietnam's own treaty rates for royalties. Claiming treaty relief there can cost you money. Check the domestic rate before you go looking for the treaty.

📄 Treaty Relief Is a Filing, Not a Right

Every rate above can come down under a double tax treaty. None of them come down automatically. No revenue authority applies a reduced rate because you were entitled to it; they apply it because the paperwork was in the payer's hands before the payment ran.

• A tax residency certificate from your own tax authority, for the relevant year, is the baseline everywhere. It is the document proving you are resident where you claim to be.
• India also wants Form 10F. Electronic filing has been mandatory since July 2022; the concession for non-residents without an Indian PAN ran to October 2023, and the portal now carries a registration category for non-residents not holding and not required to hold a PAN — but filing that way requires a Digital Signature Certificate, which is itself a lead-time item.
• Indonesia requires a Certificate of Domicile in the form its tax office prescribes, certified by your home authority, including beneficial ownership declarations confirming the treaty jurisdiction was not chosen merely to obtain treaty benefits. The wrong form is the same as no form.
• Saudi Arabia has moved toward applying reduced treaty rates at the point of payment where the documentation is submitted properly, which rewards preparation and punishes improvisation.

The consequence is operational, not legal. Documentation must exist before the first invoice is paid, not after someone notices the shortfall. Recovering over-withheld tax means filing a refund claim in a foreign country, in a foreign language, on that country's timetable. Most small licensors start the process, price the effort, and write it off.

✍️ Somebody Eats the Withholding. Decide Who in the Contract.

Licence agreements handle this in one of three ways, and the difference is worth more than most of the clauses people negotiate hardest.

1. Silence. The licensor eats it. $18,000 in the Philippines nets $13,500.
2. A full gross-up. The licensee pays whatever is needed for the licensor to receive $18,000 net, so a Philippine buyer remits $24,000 and hands $6,000 to the BIR. That is a 33% increase in the cost of the deal, and buyers who did not model it get very quiet.
3. A capped gross-up. The licensee grosses up to the applicable treaty rate only. If relief fails because the licensor's paperwork was late, the licensor bears the gap. This is the version that survives a second deal, because it puts the cost on whoever controls the outcome.

One more clause belongs beside it, and it is routinely omitted: an obligation on the licensee to deliver the tax deduction certificate, with a deadline. Without documentary proof that the tax was actually deducted and paid, your own tax authority will not give you credit for it. You will have paid the tax and lost the relief.

🧾 A Foreign Tax Credit Is Not a Refund

The standard reassurance is that you claim a credit at home and end up whole. Sometimes. Three things break it.

The credit is capped by your home tax on that income. If your effective home rate on the licence income is below the foreign rate withheld, the excess is stranded. If you are loss-making — which is a normal condition for a company investing in a catalogue — there is nothing to credit against this year, and carry-forward rules vary.

Many countries limit the credit to the treaty rate even where more was actually withheld. Over-withholding caused by missing documentation is not a timing problem in that case. It is a permanent cost.

The tax is on gross, your business runs on margin. This is the one that reshapes a P&L. If a deal carries a 40% margin and 21.84% of the gross is withheld, the tax has taken roughly 55% of the profit on that transaction before your home tax authority has looked at it. Portfolio economics built on gross licence fees — the kind in most licensing and pricing models — quietly stop working in withholding markets unless the rate is in the model from the start.

⚖️ Which Model Your Treaty Copied Sets the Ceiling

Why do rates vary so wildly between counterparties for the same product? Because treaties are built from two competing templates.

Article 12(1) of the OECD Model Tax Convention provides that royalties beneficially owned by a resident of the other contracting state are taxable only in that other state. A treaty faithfully following the OECD Model means no withholding at source at all. The UN Model deliberately does the opposite: its Article 12 preserves the source country's right to tax royalties, leaving the rate to bilateral negotiation.

Capital-importing countries negotiate from the UN Model, for the obvious reason that it keeps revenue where the customers are. So a licensor with an OECD-style treaty network can genuinely have one counterparty deducting nothing and another deducting 15% on commercially identical catalogue deals. The variance is not in your contract. It is in a document signed by two finance ministries decades before your company existed.

That settlement is currently being reopened. UN member states are negotiating a Framework Convention on International Tax Cooperation, with two early protocols, one of them specifically on the taxation of income from cross-border services. Three negotiating sessions ran through Nairobi in November 2025, with the fourth at UN Headquarters in New York from 2 to 13 February 2026 and final texts targeted for the General Assembly in 2027. The direction of travel is more source-country taxing rights on cross-border digital income, not fewer. A five-year catalogue licence signed this quarter will still be running when whatever emerges starts to bind.

🚫 Five Ways Licensing Businesses Walk Into This

1. Quoting a price with no tax clause at all. Silence is a decision. It decides against the licensor.
2. Assuming a treaty exists. Check that your jurisdiction has one with the counterparty's, that it covers royalties, and that its rate actually beats the domestic rate. All three, in that order.
3. Leaving the residency certificate to the week the invoice goes out. Tax authorities issue these on their schedule. Some take weeks. The payment does not wait.
4. Modelling revenue share on gross portal revenue. If the operator withholds on the remittance, the share you modelled and the share you receive are different numbers, and the gap compounds monthly.
5. Routing through a holding company purely for the treaty rate. Beneficial ownership and substance requirements are precisely what Indonesia's Certificate of Domicile declarations and India's courts are testing for. A letterbox company is a cheap way to lose relief you would otherwise have had.

🌲 Where Forestry Games Fits

Forestry Games has licensed games since 2017, and the catalogue now runs to 1,049 titles across HTML5 and Android, with buyers spread across telecom operators, agencies, publishers and portal owners in a lot of the jurisdictions listed above. The practical relevance is narrow but real: what a licence grants — hosting, reskinning, sublicensing, source code access, territory — is written down in the terms rather than left implied, which means the characterisation question has a documented answer before anyone's tax team asks it. If you are sizing a deal, the catalogue and the licence terms are the two documents your finance function will want first.

None of the above is tax advice, and it is not a substitute for local counsel in the jurisdiction you are actually invoicing. Rates and procedures change, sometimes with a single budget announcement.

🧭 What to Settle Before the Next Deal

Take the contract you are closest to signing and answer five questions this week.

1. What does the licence grant? Reproduction, adaptation, sublicensing, revenue share — or the use of a finished copy? Write the answer down, because it is the argument you will make later.
2. What is the counterparty's domestic royalty withholding rate? Find it before you quote, not after.
3. Is there a treaty, does it cover royalties, and is its rate lower?
4. Who bears the tax, and up to what rate? Put the capped gross-up in the draft yourself instead of waiting to see whether the other side raises it.
5. Who delivers the deduction certificate, and by when?

Deals get renegotiated over a two-point difference in revenue share while a twenty-point tax line goes unmentioned in the same meeting. The fix costs one clause and one afternoon of checking. Do it before the invoice, because afterwards the only remedy on offer is a foreign refund claim you will not bother to finish.