Article 12. ROYALTIES

Paragraph 1 grants to each Contracting State the right to tax royalties derived and beneficially owned by its residents, without regard to source. Paragraph 2 permits source taxation of royalties beneficially owned by a resident of the other State at a rate not to exceed 10 percent of the gross amount of the royalties paid.

Paragraph 3 defines the term "royalties" as used in the Convention to mean payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including computer software programs, video cassettes, and films and tapes for radio and television broadcasting. It also includes payments for the use of, or right to use, any patent, trademark, design or model, plan, secret formula or process, or other like right or property; or for information concerning industrial, commercial, or scientific experience. This definition does not refer to gain from the alienation of any right or property that is contingent on the productivity, use, or disposition of the property. Such gain is taxable only in the State in which the alienator is

resident under Article 13 (Gains from the Alienation of Property). Income from the leasing of tangible personal property is taxed under Article 7 (Business Profits).

Paragraph 4 provides an exception to the rule of paragraph 1 in cases where the beneficial owner of the royalties, a resident of one Contracting State, carries on business through a permanent establishment in the other Contracting State or performs independent personal services through a fixed base in that other State and the royalties are attributable to that permanent establishment or fixed base. In such a case, the royalties are taxable to the permanent establishment or fixed base in accordance with the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services). The same rule applies if the permanent establishment or fixed base has ceased to exist when the royalties are received, so long as the royalties were attributable to it in the earlier year.

Paragraph 5 provides a rule for determining the source of royalties. Royalties will be deemed to arise in a State if the payor is a resident of that State (including the State itself or a political subdivision thereof). However, if the payor has a permanent establishment or fixed base in a Contracting State, the liability to pay the royalties was incurred in connection with such permanent establishment or fixed base, and the royalties are borne by the permanent establishment or fixed base, the royalties will be considered to arise in the State in which the permanent establishment or fixed base is situated. Finally, if this rule does not operate to deem royalties as arising in either State, and the royalties relate to the use of intangible property (as defined in paragraph 3), they shall be deemed to arise in the State in which they are used. This source rule also applies for purposes of Article 24 (Relief from Double Taxation).

Paragraph 6 provides that, if as a result of a special relationship between persons, the royalty paid is excessive, Article 12 applies only to the amount of royalty payments that would have been made absent such special relationship (i.e., an arm's length royalty payment). Any excess amount of royalties paid remains taxable according to the laws of the United States and Ukraine, respectively, with due regard to the other provisions of the Convention. If, for example, the excess amount is treated as a distribution of profits, such excess amount could be taxed as a dividend rather than as a royalty payment, but the tax imposed on the dividend payment will be subject, if appropriate, to the rate limitations of paragraph 2 of Article 10 (Dividends).