Article 12: Royalties
Learning Objectives: You should
1.Understand what the term royalties refers to
2.Feel comfortable explaining the consequences of royalty payments between parties with a special relationship
Key Concepts
Passive Investment
Royalties
Rate of withholding
Geographic source
Payments between parties with a special relationship
Case studies
United Nations Model Double Taxation Convention between Developed and Developing Countries (2017 Update)
Article 12
Royalties
Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the beneficial owner of the royalties is a resident of the other Contracting State, the tax so charged shall not exceed ___ per cent (the percentage is to be established through bilateral negotiations) of the gross amount of the royalties. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation.
The term "royalties" as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience.
The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties are paid is effectively connected with (a) such permanent establishment or fixed base, or with (b) business activities referred to in (c) of paragraph 1 of article 7. In such cases the provisions of article 7 or article 14, as the case may be, shall apply.
Royalties shall be deemed to arise in a Contracting State when the payer is a resident of that State. Where, however, the person paying the royalties, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties was incurred, and such royalties are borne by such permanent establishment or fixed base, then such royalties shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.
Where by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.
Article 12A
FEES FOR TECHNICAL SERVICES
Fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
However, notwithstanding the provisions of Article 14 and subject to the provisions of Articles 8, 16 and 17, fees for technical services arising in a Contracting State may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the beneficial owner of the fees is a resident of the other Contracting State, the tax so charged shall not exceed ___ percent of the gross amount of the fees [the percentage to be established through bilateral negotiations].
The term “fees for technical services” as used in this Article means any payment in consideration for any service of a managerial, technical or consultancy nature, unless the payment is made:
(a) to an employee of the person making the payment;
(b) for teaching in an educational institution or for teaching by an educational institution; or
(c) by an individual for services for the personal use of an individual.
4 The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the fees for technical services arise through a permanent establishment situated in that other State, or performs in the other Contracting State independent personal services from a fixed base situated in that other State, and the fees for technical services are effectively connected with:
a) such permanent establishment or fixed base, or
(b) business activities referred to in (c) of paragraph 1 of Article 7.
In such cases the provisions of Article 7 or Article 14, as the case may be, shall apply.
5 For the purposes of this Article, subject to paragraph 6, fees for technical services shall be deemed to arise in a Contracting State if the payer is a resident of that State or if the person paying the fees, whether that person is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the obligation to pay the fees was incurred, and such fees are borne by the permanent establishment or fixed base.
6 For the purposes of this Article, fees for technical services shall be deemed not to arise in a Contracting State if the payer is a resident of that State and carries on business in the other Contracting State through a permanent establishment situated in that other State or performs independent personal services through a fixed base situated in that other State and such fees are borne by that permanent establishment or fixed base.
7 Where, by reason of a special relationship between the payer and the beneficial owner of the fees for technical services or between both of them and some other person, the amount of the fees, having regard to the services for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the fees shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.
OECD Model Tax Convention on Income and on Capital (2017 Update)
Article 12
Royalties
Royalties arising in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in that other State.
The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.
The provisions of paragraph 1 shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise through a permanent establishment situated therein and the right or property in respect of which the royalties are paid is effectively connected with such permanent establishment. In such case the provisions of Article 7 shall apply.
Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.
Article 12 Bibliography
Adolfo Martín Jiménez and José Manuel Calderón Carrero, "Spain: Distribution Agreements between Independent Parties, Royalties and Use of Secret Comparables To Fix the Royalty" in Eric Kemmeren et al, eds, Tax Treaty Case Law Around the Globe 2014 171 https://perma.cc/HGS5-FGVB
Balco, Tomas. “Kazakhstan: The Oriflame Case – Beneficial Ownership in Sub-Licence Arrangements” in Eric CCM Kemmeren et al, eds, Tax Treaty Case Law Around the Globe 2014 (Amsterdam: International Bureau of Fiscal Documentation, 2014) 151 https://perma.cc/KP5V-QW3J
Black, Celeste, Taxation of Intellectual Property Under Domestic Law and Tax Treaties: Australia (November 22, 2018). 'Australia' in Guglielmo Maisto (ed.), "Taxation of Intellectual Property under Domestic Law, EU Law and Tax Treaties", IBFD: Amsterdam, 2018.; Sydney Law School Research Paper No. 18/75 https://perma.cc/94NK-BRGG
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Brauner, Yariv. “United States: Professional Golfer: The Classification of Endorsement Fees”in Eric CCM Kemmeren et al, eds, Tax Treaty Case Law around the Globe 2012 (Vienna: Linde, 2013)225 https://perma.cc/SX63-UR3Q
Brooks, Kim. “Tax Treaty Treatment of Royalty Payments from Low-Income Countries: A Comparison of Canada and Australia’s Policies” (2007) 5:2 eJournal of Tax Research 168, online: https://perma.cc/C3Y5-SVU3
Clausing, Kimberly A. and Durst, Michael C., A Price-Based Royalty Tax? (August 15, 2015). Available at SSRN: https://perma.cc/C3Y5-SVU3
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Dourado, Ana Paula & José Almeida Fernandes. “Portugal: Tax Treaty Case Law on the Application of Art 12 (Royalties)” in Michael Lang et al, eds, Tax Treaty Case Law Around the Globe 2013 (Vienna: Linde, 2014) 157 https://perma.cc/SX63-UR3Q
Garbarino, Carlo, The Tax Treaty Implications of the Remuneration as Royalties of Intellectual Property and Intangibles (March 19, 2018). European Business Law Review, Forthcoming. Available at SSRN https://perma.cc/GK7A-LHQS
García Heredia,Alejandro. “Software Royalties in Tax Treaties: Should Copyright Rights Be Reconsidered in the OECD Commentary on Article 12?” (2005) 59:6 Bull Intl Fiscal Doc 225.
Jiménez, Adolfo Martín & José Manuel Calderón Carrero. “Spain: Distribution Agreements between Independent Parties, Royalties and Use of Secret Comparables to Fix the Royalty” in Eric CCM Kemmeren et al, eds, Tax Treaty Case Law Around the Globe 2014 (Amsterdam: International Bureau of Fiscal Documentation, 2014) 171 https://perma.cc/KP5V-QW3J
Kemmeren, Eric CCM. “Netherlands: Income from Former Research and Fixed Base and an Origin-Based Alternative” in Eric CCM Kemmeren et al, eds, Tax Treaty Case Law Around the Globe 2014 (Amsterdam: International Bureau of Fiscal Documentation, 2014) 55 https://perma.cc/NSX3-CGLR
Litwińczuk, Hanna. “Poland: Payments for Copyrights of Computer Software as Royalties” in Michael Lang et al, eds, Tax Treaty Case Law Around the Globe 2011 (Alphen on the Rhine: Kluwer Law International, 2012) 279 https://perma.cc/6CC9-SG2E
M.T. Malan, "OECD - New Article 12A of the UN Model Regarding Fees for Technical Services: Ahead of Its Time or a Step Too Far?" (2019) 73:2 Bulletin for International Taxation https://perma.cc/CQN8-Z76B
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Meloni, Eduardo O, "Argentina - Taxation of Royalties under Treaty Law: How Far Can a Source State Go?’ (2010) Bull Intl Tax 315 https://perma.cc/U2C6-45EY
Neville, Jr, Mark K. “The Debate on Import Royalties and License Fees” (2008) 19:8 J Intl Tax 17.
Nogueira, João Félix Pinto. “Portugal: The Meaning of Royalties and Payments for Software” in Eric CCM Kemmeren et al, eds, Tax Treaty Case Law around the Globe 2012 (Vienna: Linde, 2013)185 https://perma.cc/SX63-UR3Q
Ruiz Jiménez, César Alejandro. “Mexico: The Application of Article 12 to Income Derived by the Lease of Industrial, Commercial and Scientific Equipment” in Michael Lang et al, eds, Tax Treaty Case Law Around the Globe 2013 (Vienna: Linde, 2014) 187 https://perma.cc/D5NX-W2GK
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Sengupta, DP. “India: The Right Florist Case: Online Advertisement Revenues and the Legal Effect of India’s Position on the OECD Model” in Eric CCM Kemmeren et al, eds, Tax Treaty Case Law Around the Globe 2014 (Amsterdam: International Bureau of Fiscal Documentation, 2014) 191 https://perma.cc/NSX3-CGLR
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Taslim, Sabah, Taxation of Software for Foreign Companies (October 30, 2018) https://perma.cc/FW67-VJHV
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Vann, Richard. “Australia: Royalties – Task Technology and Seven Network Cases” in Michael Lang et al, eds, Tax Treaty Case Law Around the Globe 2015 (Vienna: Linde, 2016) 183 https://perma.cc/26K4-SQ96
Yalti, Billur. “Turkey: Leasing of Aircraft – Characterization of Leasing Payments as Royalties” in Eric CCM Kemmeren et al, eds, Tax Treaty Case Law Around the Globe 2014 (Amsterdam: International Bureau of Fiscal Documentation, 2014) 161 https://perma.cc/NSX3-CGLR
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Article 12 Cases
Angoss International Ltd v Her Majesty the Queen, 4 February 1999. [1999] 2 CTC 2259
Audiencia Nacional (National Court), RG 231/1996, 7 February 2000, Jurisprudencia Tributaria, 2000, I, 1203 (Spain).
Audiencia Nacional (National Court), RG 257/1997, 4 May 2000, Jurisprudencia Tributaria, 2000, I, 167 (Spain).
Audiencia Nacional (National Court), RG 590/1997, 6 April 2000, Jurisprudencia Tributaria, 2000, II, 114 (Spain).
Audiencia Nacional (National Court), 1069/2004, 24 April 2008, Jurisprudencia Tributaria, 2008, 170704 (Spain).
Audiencia Nacional (National Court), 1995-05-16, 16 May 1995, Fiscalidad Internacional Convenios de Doble Imposicion. Doctrina y Jurisprudencia de los Tribunales Espanoles – Aranzadi, 1998, 364; February 1995 (Spain).
Audiencia Nacional (National Court), 207021/1990, 28 June 1994, Jurisprudencia Tributaria, 1994, 684 (Spain).
Boulez v. Commissioner 83 T.C. 584 (1984)
Brad-Lea Meadows Ltd v MNR, [1990] 1 CTC 2306 (TCC).
Bundesfinanzhof (Federal Fiscal Court), I R 41/92, 5 November 1992, Bundessteuerblatt, 1993, II, 407.
Bursa Tax Court, E.2011/777 – K.2012/328, 22 March 2012 (Turkey).
Exchequer Court of Canada, Western Electric Co. v. Minister of National Revenue, 11 April 1969
CBS/Fox Co v The Queen, [1996] 1 CTC 3 (FCTD).
Central Administrative Court, 3 October 2013, No 2296/2012 (Spain).
Commissioners of Taxation v Seven Network Limited, [2016] FCAFC 70 (Australia).
Commissioners for Her Majesty’s Revenue and Customs, PKR 651, 30 May 1996, (1996) MSTC 2, 752 (Malaysia).
Corte Suprema di Cassazione (Supreme Court), 1768, 30 January 2004 (Italy).
Corte Suprema di Cassazione (Supreme Court), 3251, 20 March 2000 (Italy).
Corte Suprema di Cassazione (Supreme Court), 3414, 21 February 2005 (Italy).
Corte Suprema di Cassazione (Supreme Court), 3931, 15 January 1981 (Italy).
Corte Suprema di Cassazione (Supreme Court), 14253, 28 October 2000 (Italy).
Dalkia International SA v the Tax and Customs Board(Estonia).
Décimo Tercer Tribunal Colegiado en Materia Administrativa del Primer Circuito [Thirteenth Administrative Court of the First Circuit], 20 August 2012, No 562/2011-9995.
Farmparts Distributing Lts v Her Majesty the Queen, [1980] CTC 20528 February 1980.
Federal Court, Civil Appeal No 39 of 1981, 25 September 1982, [1983] 1 MLJ 74 (Malaysia).
Federal Court of Appeal, Davis v. Her Majesty the Queen, 15 January 1980.
Georges Simenon v Commissioner of Internal Revenue, 29 September 1965, 44 TC 820 (United States).
Goosen v Commissioner of Internal Revenue, 136 TC 27 (US Tax Ct 2011).
Hana Semiconductor (Bangkok) Co Ltd v Thai Revenue Department, 23 February 2006, (2006) 1056/2549 (Thailand).
High Court, 14-1-88, 22 March 1990, (1990) 1 MSTC 3, 146 (Malaysia).
Hindalco Industries Ltd v Assistant Commissioner of Income Tax, [2005] 94 ITD 242 Mum (India).
Hoge Raad der Nederlanden [Supreme Court of the Netherlands], 6 December 2013, No 12/00252 (Netherlands).
Højesteret [Supreme Court], 14 February 2014, No SKM2014.347HR (Denmark).
Istanbul 8th Tax Court Decision, E 2015/404, K2016/386, 26.2.2016 (Turkey).
Jules Samannv Commissioner of Internal Revenue, 14 September 1961, 36 TC 1011 (United States).
Kolkata Tribunal, 12 April 2013, Right Florist Ltd, No 2013-TII-ITAT-KOL-INTL (India).
Kotak Mahindra Primus Ltd v Assistant Commissioner of Income Tax, [2006] 100 ITD 203 Mum (India).
Madras High Court, 7 November 2013, Verizon Communications Singapore Pte Ltd, No 2013-TII-48-HC-MAD-INTL (India).
Mahindra Limited v Commissioner of Taxation, [2016] FCAFC 130 (Australia).
MCA Television v The Queen, [1994] 2 CTC 148 (FCTD).
Mcdermott Industries v Commissioner of Taxation of the Commonwealth of Australia, 29 April 2005, [2005] FCAFC 67 (Australia).
MNR v Paris Canada FilmsLtd, [1962] CTC 538 (Ex Ct).
Mumbai Tribunal, 12 Feburary 2013, Siemens Ltd, No 2013-TII-34-ITAT-MUM-INTL (India).
R. v. Farmparts Distributing Ltd.1980 CarswellNat 238
Satyam Computer Services Limited v. Commissioner of Taxation, [2018] FCAFC 172
Sergio Garcia v Commissioner of Internal Revenue, 140 TC No 6 (US Tax Ct 2013).
Supreme Administrative Court, 10 February 2013, No E.2011/1367 (Turkey).
Supreme Administrative Court, 13 January 2010, No II FSK 1182/08 (Poland).
Supreme Administrative Court, 2 February 2011, Appeal 0621/09 (Portugal).
Supreme Administrative Court N 533 of January 19th 2015 (Bulgaria).
Supreme Court, No 3r-215/2013 (Kazakhstan).
Supreme Court of Kazakhstan decision of February 2016 (Kazakhstan).
Task Technology v Commissioner of Taxation, [2014] FCA 28, 16 ITLR 749, aff’d [2014] FCAFC 113, 17 ITLR 191 (Australia).
Tax Court, Bursa, First Chamber, 22 March 2012, No K.2012/328 (Turkey).
Tax Court, Instanbul, First Chamber, 9 March 2012, Nos E.2011/1221, K.2012/355 (Turkey).
Tribunal Central Administrativo Sul [Central Administrative Court – South], 3 July 2012, No 03506/09 (Portugal).
Tribunal Central Administrativo Sul [Central Administrative Court – South], 5 August 2012, No 4665/11 (Portugal).
TVS Motor Co Ltd v ITO,[2010] 35 SOT 230 (Income Tax Appellate Tribunal India).SeeShrikant S Kamath, “Payment to U.K. Company Partially Taxable as Fee for Technical Services, Indian Tax Tribunal Concludes” (2009) Tax Analyst Doc No 24061.
Tribunal Economico Administrativo Central (Central Economic-Administrative Court), 4085/2005, 28 February 2008, Jurisprudencia Tributaria, 2008, 761 (Spain).
Tribunal Supremo (Supreme Court), RG nums 6206/1995,3 June 2000, Asociacion Espanola de Aserores Fiscales, Fiscalidad Internacional, Convenios de Doble Imposicion – Aranzadi, 2000 262 (Spain)
Tribunal Supremo (Supreme Court), RG nums 7103/1995, 29 July 2000, Asociacion Espanola de Aserores Fiscales, Fiscalidad Internacional, Convenios de Doble Imposicion – Aranzadi, 2000 262 (Spain)
Unisys Corporation v Federal Commissioner of Taxation, [2002] NSW the SC 1115 (Australia).
Vauban Productions v R, [1979] CTC 262 (FCA).
Velcro Canada Inc v The Queen, 2012 TCC 57.
Veracel Celulose SA v National Treasury, AMS 200450010013545, 2nd Regional Federal Court TRF2, 2010 (Brazil).
Verwaltungsgerichtshof (Supreme Administrative Court), 99/13/0036, 17 December 2003 (Austria).
Verwaltungsgerichtshof (Supreme Administrative Court), 2003/13/0015, 31 May 2006, Finanzrechtliche Erkenntnisse des VfGH und VwGH, 2006, 59, 23, 689 (Austria).
Western Electric Co v MNR, [1969] 2 Ex CR 175 (Ex Ct), aff’d [1971] CTC 96 (SCC).