ARTICLE 14

Royalties

The 1954 Convention provided that royalties derived from sources within one State by a resident of the other State not having a permanent establishment in the former State (or having a permanent establishment of the construction type if the royalties are not attributable thereto) would not be subject to tax in the former State at a rate in excess of 10 percent.

The new Convention retains the 10-percent rate on royalties. However, as noted above in connection with Article 12 (relating to dividends) and Article 13 (relating to interest), the Convention abandons the "force of attraction" principle, replacing it with the effectively connected approach. Thus, the reduced rate of tax applies unless the recipient has a permanent establishment in the State of source and the property or rights giving rise to royalties are effectively connected with such permanent establishment. In such a case, the royalties may be taxed as industrial or commercial profits.

The term "royalties" is defined to include

(a) payments of any kind made as consideration for the use of, or the right to use, copyrights of literary, artistic, scientific works, or motion picture films or films or tapes used for radio or television broadcasting, patents; designs, or models, plans, secret processes or formulae, trademarks, or other like property or rights, or know-how, or ships or aircraft (but only if the lessor is a person not engaged in the operation in international

traffic of ships or aircraft) and

(b) gains derived from the sale, exchange, or other disposition of such property or rights (other than ships or aircraft) to the extent that payment is contingent on productivity, use or disposition of the property or rights.

If the payments in the second category are not so contingent, Article 16 (relating to capital gains) applies. The term "know-how" includes existing scientific, technical, industrial and commercial knowledge or information where such knowledge or information is transmitted or supplied to the payor (as opposed to a contract for the development of knowledge or information or for the use of knowledge or information by the payee in connection with the rendition of services to the payor). The term also includes assistance of an ancillary and subsidiary nature furnished as a means of enabling the application or enjoyment of a transferred intangible.

If excessive royalties are paid between a payor and a related recipient, the provisions of this article apply only to so much of the royalty as would have been paid to an unrelated person. The excess payment may be taxed by each State according to its own law including the provisions of the Convention where applicable.

The source of income from royalties is determined under paragraph (3) of Article 6 (relating to the source of income).