The premise behind the 25 percent rule is that a municipality’s long-term debt should not exceed 25% of its yearly budget. Any debt in excess of this amount is deemed excessive and creates a danger to the municipality, as the debt may be difficult to service.
The 25 percent rule also refers to a royalties calculation method that requires a party selling a product or service based on another party’s intellectual property to pay that party a royalty of 25% of the gross profit made from the sale, before taxes. Trademarks, copyrights, patents, and other kinds of intellectual property are all subject to the 25% rule.