Article 12 provides rules — U.S. Income Tax Treaty

taxation of royalties.

Paragraph 1 grants to the residence State the exclusive right to tax royalties arising in the other State, and derived and beneficially owned by a resident of the first-mentioned State.

Paragraph 2 generally follows other U.S. treaties and defines the term "royalties" for purposes of the Convention to mean payments of any kind received as a consideration for the use of, or


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the right to use, any copyright of a literary, artistic, or scientific work; for the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process; or for information concerning industrial, commercial, or scientific experience. The term also includes gains derived from the alienation of any such right or property that are contingent on the productivity, use, or further alienation thereof. In addition, payments received in connection with the use or right to use cinematographic films, or works on film, tape, or other means of reproduction used for radio or television broadcasting are specifically included in the definition of royalties. The reference to "other means of reproduction" makes clear that future technological advances in the field of radio and television broadcasting will not affect the inclusion of payments relating to the use of such means of reproduction within the definition of royalties.

Paragraph 3 of Article 12 provides an exception to the source country exemption for royalties in cases where the beneficial owner of the royalties carries on business through a permanent establishment in the source state or performs independent personal services from a fixed base situated in the source state and the royalties are attributable to the permanent establishment or fixed base. In such cases the provisions of Article 7 (Business profits) or Article 14 (Independent personal services) will apply, and the source state will generally retain the right to tax such royalties on a net basis.

Paragraph 4 deals with cases involving special relationships between the payor and beneficial owner of a royalty. Paragraph 4 provides that the provisions of Article 12 apply to royalty payments between related persons only to the extent that such payments would have been made absent such special relationships ( i.e ., an arm's length royalty payment). Any amount in excess of an arm's length payment remains taxable according to the laws of the source State, with due regard to the other provisions of the Convention. If, for example, the excess amount is treated as a distribution of profits under the national law of the source State, such excess amount will be taxed as a dividend rather than as a royalty payment, but the tax imposed on the dividend payment will be subject to the rate limitations of paragraph 2 of Article 10 (Dividends).

Notwithstanding the limitations on source country taxation of royalties contained in this Article, the saving clause of paragraph 4 of Article 1 (Personal scope) permits the United States to tax royalties received by its residents and citizens, subject to the special foreign tax credit rules of paragraph 3 of Article 23 (Relief from double taxation), as if the Convention had not come into effect.


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As with any benefit of the Convention, a resident of one of the States claiming the benefit of this Article must be entitled to the benefit under the provisions of Article 17 (Limitation on benefits).