Overseas Payments for Tech or IP: Legal Traps in Withholding Tax

You’ve struck a deal to license software, use a proprietary algorithm, or pay fees for valuable IP from an overseas partner. All good, right?

Not quite. Because there’s a hidden trap many Australian businesses miss: royalty withholding tax.

And here’s the kicker — “royalty” in this context is broader than most people think. It doesn’t just mean traditional royalty payments. It can also include licence fees, software payments, and other charges for the use of intellectual property. If you’re sending money offshore for access to IP or tech, you may be squarely in the ATO’s sights.

This issue often flies under the radar. In our last article, we explored whether to structure an IP deal as an assignment or a licence. But whichever path you take, if the rights holder is overseas, you could be taking on a hidden obligation to the ATO to withhold part of those payments.

And this isn’t just a “big business” issue. Yes, the High Court recently handed down a decision in the much-publicised PepsiCo case on royalties and withholding tax, but SMEs and startups are just as exposed.

Why SMEs Should Pay Attention

If your business is licensing software, paying for cloud-based platforms, or using overseas trademarks, there’s every chance your payments fall into the “royalty” category for tax purposes.

And if you don’t withhold, the ATO won’t chase your overseas licensor in Bermuda or the British Virgin Islands. They’ll come after you.

Don’t Pay Twice: Nail the Contract Clauses

Here’s the legal trap: if your contract doesn’t allow you to deduct withholding, you may end up paying the full licence or software fee to the overseas entity and the withholding tax to the ATO. That’s effectively paying twice.

This is why careful drafting matters. Just as we explained in our article on assignment vs licence, the way you structure and word your agreements can have real financial consequences.

What to do:

• Include a clear withholding clause. This makes sure you can lawfully deduct the tax from each payment.
• Resist “gross-up” clauses. These clauses force you to top up the payment so the overseas party still receives their full amount even after withholding. That shifts the burden back to you — not fair and not necessary.

If you get pushback, remember: in most cases, the overseas party can claim a foreign tax credit in their home country. If they’re not in profit and can’t claim it, that’s their problem — not yours.

How Much Do You Withhold?

It depends on where your counterparty is based:

• Treaty countries: where Australia has a double tax treaty, the rate is usually 5–15%.
• No treaty: the default is 30%.
• Tax havens: exotic places like the Cayman Islands, Bermuda, and Panama, and even some unexpected location like Cyprus, attract the full 30% with no relief.

Knowing your counterparty’s jurisdiction can make a serious difference to the bottom line.

The Bottom Line (and Disclaimer)

Royalty withholding tax isn’t something you can contract away, and it doesn’t just apply to “classic” royalties. If you’re an Australian SME making payments overseas for tech, software, or IP, you could be walking into a legal trap without even realising it.

The fix? Make sure your agreements are watertight, your clauses are in your favour, and you’ve checked the treaty position.

And remember: this is both a legal and a tax issue. At Clearscope Legal, we can help you get the legal framework right, but you should also seek specialist tax advice to manage your specific obligations.

Because while royalties and licence fees are about rewarding innovation, the ATO sees them as another revenue stream. Don’t let your next overseas deal turn into an accidental donation to the tax office!

👉 Want to make sure your overseas IP or software deal doesn’t turn into a double-payment nightmare?

Reach out by email admin@clearscopelegal.com.au or on 03 8683 5645 and we’ll be happy to line up a free initial consult.