6.1 Royalties, Technical Fees & Franchise Fees

Why RFT is an Authorized Dealer exam topic

Module 3 of the NIBAF Foreign Trade Certificate Program (Understanding Modalities of Foreign Currency Remittances) tests commercial remittances that are not imports of goods. Royalty, franchise and technical-service (RFT) fees sit in Chapter 14, Para 12 of the current Foreign Exchange Manual. This OpenExamPrep section is independent study material for that Pakistani Authorized Dealer (AD) file. It is not an SBP, BOI, FBR or NIBAF publication.

FE Circular No. 07 of 2021 (5 August 2021) rewrote Para 12 and delegated acknowledgement of RFT agreements to ADs. Each AD must run a Head Office centralized unit, staffed by officers who know the RFT rules and headed by a senior officer. That unit reviews draft agreements, obtains Head of Compliance clearance, issues internal approval so a branch can send the acknowledgement letter, designates the banker, and keeps a party-wise record of agreements and remittances. Internal audit must periodically review Chapter 14 commercial remittances and report to the Board audit committee. Non-compliance can draw Foreign Exchange Regulation Act, 1947 (FERA) enforcement against the AD.

EPD Circular Letter No. 09 of 2025 (11 September 2025) placed an updated Chapter 14 on SBP's site. EPD Circular Letter No. 12 of 2025 (19 December 2025) then revised only Para 12(ii)(b) for agriculture, social, infrastructure and service-sector projects including international food chains. An AD who still applies the pre-December 2025 5 percent / USD 100,000 / five-year food-chain table is using a superseded sub-paragraph.

What counts as royalty, franchise fee, or technical service fee

Chapter 14 Para 12(i) currently defines three related but distinct payments:

• Royalty is consideration for a user right: patent, invention, design or model, secret formula or process, trademark or other intangible, including a licence and the right to receive technical, industrial, commercial or scientific knowledge. It may be annual or periodical.
• Franchise fee is the price of a specialized licence: the franchisee may use a business model plus a bundle of intellectual-property rights (trademarks, service marks, patents, trade secrets, copyrighted works) with training, technical support and mentoring.
• Technical service fee (TSF) is periodic or lump-sum pay for managerial, technical or consultancy work in which the foreign collaborator uses its own technology to perform a service so the Pakistani recipient can later perform the function independently. Examples in the Manual: engineering and technical assistance on process, testing and quality control; patented or secret know-how; continuous research disclosure; technical training of local staff.

The Manual's own distinction: royalty lets the user use the technology; TSF is the owner performing a service with that technology.

Published exclusions (do not force these into the RFT box)

Para 12(i)(d) currently excludes, among other things:

• equipment-supply contracts and on-site installation guidance claimed as salary of non-residents
• advisory information given from the provider's own know-how and experience that is not a licence of an underlying asset
• amounts in the nature of capital gains or an outright sale
• payments where the recipient is not the owner or licence holder of the underlying asset
• simple conventional processes or goods already undertaken or produced in Pakistan without foreign technical collaboration

Doubt goes to SBP. Each agreement must show value addition (export generation, import substitution, employment, development of technical know-how). Branch offices of foreign entities are not eligible for any RFT fee.

Current published rate tables (open the circular, do not mix vintages)

If a manufacturing lump sum exceeds USD 1,000,000, the excess plus recurring royalty still cannot exceed the prescribed percentage of net sales for the relevant period. That is a published net-sales envelope, not a second free bucket.

The Chapter 14 PDF still prints a 2.0 percent of net sales cap for mere use of a brand name (retail-store style) and for files that fail to show verifiable value addition or transfer of know-how. EPD CL 12 of 2025's Annexure-A restates the recurring and lump-sum structure for Para 12(ii)(b); until SBP reprints the 2 percent sentence out of the chapter, treat it as still published for brand-name-only files.

BOI's investment-regime web table still showed, when opened for this section, older non-manufacturing figures (lump sum USD 100,000, 5 percent of net sales, five years). Those figures match pre-December 2025 Para 12(ii)(b). For the NIBAF exam, the later SBP circular governs the AD file. Manufacturing in the same BOI table is described as having “no restriction” for royalty and technical fee; that slogan does not override Chapter 14's 8/10 percent net-sales arithmetic.

Principles the centralized unit must see before acknowledgement

Para 12(iii) currently says agreements that meet the following do not need SBP acknowledgement — the AD's own acknowledgement is enough:

• documented value addition / value creation and right-of-use / know-how papers
• external auditor with satisfactory QCR rating verifying the calculation and commenting on value addition
• fee not above the published ceiling; manufacturing files above the rate go to FEOD (SBP-BSC) with justification
• duration not beyond the table for that product or brand
• market price; if the counterparty is a related party, the applicant's auditor certifies arm's-length pricing that is transparent and verifiable
• RFT on imported goods sold under own or a different brand is limited to the prescribed percentage of local value addition (local sales minus imported items and taxes)
• RFT only on core franchise items that carry the trade name's specialties
• no double RFT on the same item (the Manual's example: a food chain cannot remit franchise fee on soft drinks sold under another brand)
• only technical and unconventional processes that cannot be produced in Pakistan without foreign collaboration
• net local sales exclude all taxes and imported (direct/indirect) components; export sales use FOB net of taxes and imported components
• a formal agreement valid for the resident company's business year with no delayed-payment penalty clause
• no RFT to a branch office of a foreign entity
• deleted or localized components: RFT only on the proportionate net sales price of those components

Manufacturer / franchisee AD file — acknowledgement then remittance

Step 1 — one-time acknowledgement (Appendix V-52)

The applicant whose draft meets Para 12(iii) approaches the centralized unit through the operating branch on Appendix V-52 with:

1. CEO/CFO application to the branch / head of the centralized unit
2. Board resolution, certified by the company secretary, naming the foreign counterparty, rate, remittance periodicity and intended banker
3. certified draft agreement (and the executed copy after signing)
4. CEO/CFO undertaking that the same agreement has not already been acknowledged or remitted through another AD — the centralized unit must send a copy of that undertaking to FEOD, SBP-BSC within three working days of acknowledgement

The unit reviews (including Head of Compliance), then internally authorizes the branch to issue the acknowledgement letter and designate the banker. The company must disclose in audited financial-statement notes the total remitted under each RFT agreement and the designated banker's name.

Change of designated AD needs a new Board resolution, the usual papers, an external-auditor certificate of amounts already remitted, and an NOC plus record transfer from the old centralized unit within seven working days.

Files that do not meet the parameters go from the centralized unit to FEOD, SBP-BSC with a Group Head-Compliance recommendation.

Step 2 — each remittance (Appendix V-53)

After acknowledgement, the designated branch remits without SBP's prior approval if it holds:

• Appendix V-53 application
• invoices signed and stamped by CEO or CFO verifying the RFT arithmetic
• invoices certified by a QCR-rated external auditor, showing tax deducted and certifying Para 12 principles
• evidence of government taxes, duties or fees deducted, or an exemption certificate from the tax authority kept on the centralized unit's file for SBP inspection

The Group Head Compliance / Operations must keep computerized MIS of acknowledgements and remittances. The centralized unit reports each acknowledged agreement to FEOD by the 5th working day of the following month (applicant, beneficiary, upfront fee, recurring percentage, period, underlying product, benefit for the economy).

Para 12A is a different box: business-process outsourcing of non-core activities needs FEOD case-by-case acknowledgement, total BPO plus other overseas-affiliate service acquisition not more than 15 percent of operating cost (excluding interest and taxes) with an auditor certificate, and no remittance for mere ownership-interest costs (management control, governance, allocated executive time).

Para 13 (installation, commissioning, training technicians) is also not RFT: ADs may remit on certified service invoices and the service agreement, still deducting income tax or holding an FBR exemption certificate.

FBR withholding — section 152-style certificates the AD must see

Chapter 14 does not invent a tax rate. It requires the AD to see that applicable government taxes have been deducted or that the applicant holds an exemption certificate from the competent tax authority.

Opened FBR text of Income Tax Ordinance, 2001, section 152:

• Section 152(1): every person paying royalty or fees for technical services to a non-resident that is chargeable under section 6 shall deduct tax from the gross amount at the rate in Division IV of Part I of the First Schedule.
• Section 152(1C): a banking company or financial institution remitting a fee for offshore digital services chargeable under section 6 shall deduct tax at the same Division IV rate — relevant when the same customer later pays cloud or advertising invoices (section 6.2).
• FBR's published withholding cards still commonly list 15 percent of the gross amount for section 152(1) royalty/FTS, with Tenth Schedule doubling for persons not on the Active Taxpayers' List, and a lower treaty rate only if the file supports it. Treat 15 percent as the non-treaty card figure last opened, not as a number an AD may guess. If the live Finance Act card on exam day differs, the Ordinance and the current FBR card control.
• If the applicant claims the RFT is exempt from Pakistan tax, Chapter 14 still wants the competent tax authority's certificate on the remittance file — a CEO email is not a substitute.

Pakistani AD scenarios

Scenario A — auto-parts manufacturer. A Lahore company licences a German patented process. Centralized unit acknowledges an agreement: USD 400,000 lump sum plus 6 percent of net local sales of that component (taxes and imported steel already stripped). Year-1 remittance: Appendix V-53, CEO-stamped invoice, QCR auditor certificate, section 152 deduction evidence. The AD does not add the imported-steel cost back into the royalty base.

Scenario B — new international food-chain franchisee (post-19 December 2025). A Karachi company opening its first outlets wants USD 180,000 lump sum plus 8 percent of net local sales of core menu items. EPD CL 12 of 2025 allows the lump sum for new operations only, inside the 8 percent envelope, adjusted against later recurring fees, term up to 10 years. The AD does not treat USD 180,000 as extra to 8 percent. Soft-drink sales under a third-party brand are out of the franchise base.

Scenario C — existing food chain asking for a fresh lump sum. CL 12 of 2025: existing operations — lump sum not allowed. Recurring 8 percent of net local sales may still be remitted under an acknowledged agreement. A request above USD 250,000 for a new operation goes to BOI, not to a branch manager's discretion.

Scenario D — related-party TSF. A textile mill pays TSF to its Singapore parent. Without the applicant's QCR auditor certifying arm's-length pricing, the centralized unit does not acknowledge. It does not “net off” the fee because the parties are affiliates.

Scenario E — foreign branch asking for royalty. A foreign company's Pakistan branch invoices its head office for a trademark. Para 12(iii)(l): branch offices are not eligible for any RFT. The AD refuses the RFT box; profit or head-office expense is a Para 15 question (section 6.4), not Para 12.

Traps

• Applying BOI's stale 5 percent / USD 100,000 / five-year food-chain line after EPD CL 12 of 2025
• Treating the USD 250,000 new-operations lump sum as additional to 8 percent rather than inside it
• Allowing a lump sum to an existing service-sector or food-chain operation
• Computing 8 percent on gross sales including sales tax and imported components
• Remitting RFT from a branch office of a foreign entity
• Skipping the QCR auditor invoice certificate or the FBR exemption / section 152 evidence
• Using Para 12 for BPO (Para 12A / FEOD) or for installation technicians (Para 13)
• Calling this OpenExamPrep chapter an official SBP or NIBAF circular