Impact of royalty payments on customs duties payable when importing goods into the USA

1. Background

On August 7, 2025, tariffs on imports of goods into the United States came into effect for nearly 70 countries. The tariff rates range from 10% to 50%. Most goods from the European Union are subject to a 15% tariff, with the U.S. government reserving the right to increase this to 35% if the European Union purchases less U.S. energy (USD 750 billion) and/or makes fewer investments (USD 600 billion) in the U.S. than agreed.

2. When and by whom are the tariffs payable?

The importer, i.e. the U.S. company importing the goods, is liable for payment of the customs duties when the goods are imported. The customs duties are levied at the U.S. border by the U.S. Customs and Border Protection.

3. How are the customs duties calculated?

Apart from exceptional cases where duties are levied on the basis of quantity or number of items, the amount of duty actually payable is based on the customs value of the goods to be imported (so-called ad valorem duties).

There are various methods for determining the customs value, with the “transaction value method” being the preferred method. In general, this method should only be deviated from if the transaction value cannot be determined or if the companies are affiliated (group) companies and it cannot be demonstrated that the transaction value is appropriate. These special cases will not be discussed further.

The legal basis for the transaction value method can be found in 19 U.S.C. §1401a. According to 19 USC §1401a(b)(1), the transaction value is determined as follows (underlining added):

“(1) The transaction value of imported merchandise is the price actually paid or payable for the merchandise when sold for export to the United States, plus amounts equal to
[…]
(D) any royalty or license fee related to the imported merchandise that the buyer is required to pay, directly or indirectly, as a condition of the sale of the imported merchandise for export to the United States; and
[…]”

This means that any license payment made by the importing US company under the “transaction method” increases the customs value and thus the customs duty payable if the license payment is a condition of sale of the imported goods for export to the United States.

4. When is the license payment considered a condition for the sale of the imported goods for export to the United States?

The decisive question is now under what circumstances the condition of 19 USC §1401a(b)(1)(D) is fulfilled, i.e., under what conditions the license payment is considered a condition for the sale of the imported goods for export to the United States.

In general, the so-called “Generra Presumption” applies. This is a rebuttable presumption that all payments made by a buyer to a seller or a party related to the seller are part of the price actually paid or payable for the imported goods. (Generra Sportswear Co. v. USA, 8 CAFC 132 (1990)) The burden of proof that payments are not related to the imported goods lies with the importer. (Moss Mfg. Co. v. United States, 896 F. 2d 535, 539 (Fed. Cir. 1990))

In other words, if there is a connection between a payment made by the importing U.S. company to the selling foreign company and the import of goods, this payment will in most cases increase the customs value of the imported goods and thus the amount of customs duty payable.

It should be noted, however, that license payments may increase the customs value even if they do not directly or indirectly benefit the seller.

In general, license payments increase the customs value if the following three conditions are met (see General Notice, Dutiability of Royalty Payments, Vol. 27, No. 6 Cust. B. & Dec. at 1 (February 10, 1993) (“Hasbro II ruling”):

1. The imported goods were manufactured under patent protection (this may be the case, for example, if patented technology is used in the manufacturing process).
2. The manufacture or sale of the imported goods was tied to the payment of license fees (this may be the case, for example, if the license agreement establishes a nexus between the license fees and the manufacture of the goods).
3. The importer would not have been able to purchase the product without paying the fee.

Whether and to what extent the above three points are fulfilled may be determined, among other things, by the respective license agreements or the wording and conditions specified therein. Numerous decisions have been made on such issues over time. However, the highly differentiated case law and interpretation of the three conditions indicate that it is not possible to make general statements on the existence or non-existence of these conditions. Each case must therefore be examined individually.

5. What are the obligations of the importer?

In principle, the importing company is obliged to provide the U.S. customs authorities with the information required to determine the customs duty to be paid. The U.S. company must act with “reasonable care” in doing so. If the importing company violates this obligation, it may face severe penalties, even if the violation was unintentional. If an importing company discovers its own violation after the fact, it can voluntarily report the violation to the U.S. customs authorities (known as “prior disclosure”) and thus reduce the risk of penalties.

6. Conclusion

Whether and to what extent license payments affect the customs value and thus the amount of customs duties payable on goods imported into the U.S. depends heavily on the individual case. The changing customs landscape therefore not only poses risks for companies, but can also, if license agreements are skillfully structured, lead to a reduction in customs duties compared to competitors and thus provide a competitive advantage.