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

taxation of royalties.

Paragraph 1 provides the general rule that royalties derived and beneficially owned by a resident of a Contracting State shall


be taxable only in that State. Except for motion picture royal

ties, which are dealt with in paragraph 2, the residence state has the exclusive right to tax royalties derived and beneficially


owned **by** its residents. The source State shall treat the recipi

ent of royalties as the beneficial owner of such royalties for purposes of Article 12 if the recipient is the person to which the income is attributable for tax purposes under the laws of the source State.

Paragraph 2 contains an exception to the exemption at source


provided in paragraph **1.** The source State may tax royalties that

constitute consideration for the use of, or the right to use, motion picture films, or films, tapes or other means of reproduc tion used for radio or television broadcasting, but at a rate not


above **10** percent of the gross amount of the royalty. The refer
ence to "other means of reproduction" clarifies that the **10**

percent tax at source will apply to payments resulting from the

use of means of reproduction that reflect future technological

advances in the field of radio and television broadcasting.

The source treatment for royalties in the 1956 Convention (ije., exemption at source for most royalties and source taxation


at a rate **of** **10** percent for motion picture royalties) is carried

forward to the Convention.


**AUSTRIA** 354
Supp. No. **6** **(1998)**

**_-35_**

Paragraph **3** defines the term "royalties" as used in the

convention as 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; for the use of, or the right to
use, any patent, trademark, design or model, plan, secret formula

or process, or other like right or property;.or for the use of,
or the right to use, information concerning industrial, commer
cial, or scientific experience. Royalties also include gains

derived from the alienation of any such right or property that are contingent on the productivity, use, or further alienation thereof.

The term royalties is defined in the Convention and therefore


is generally independent of domestic law. Certain terms used in

the definition are not defined in the Convention, but these may


be defined under domestic tax law. For example, the term "secret
process or formulas" is found in the Code, and its meaning has

been elaborated in the context of sections **351** and **367.** See Rev.
Rul. **55-17,** **1955-1** C.B. **388;** Rev. Rul. **64-56,** 1964-1 C.B. **133;**

Rev. Proc. 69-19, 1969-2 C.B. 301.


The term "industrial, commercial, or scientific experience"
(sometimes referred to as "know-how") has the meaning ascribed to
it in the paragraph **11** of the Commentary to Article 12 of the
**OECD** Model Convention. Consistent with that meaning, the term
may include information that is ancillary to a right otherwise

giving rise to royalties, such as a patent or secret process.

The term "industrial, commercial, or scientific experience"
(sometimes referred to as "know-how") has the meaning ascribed to
it in the paragraph **11** of the Commentary to Article 12 of the
**OECD** Model Convention. Consistent with that meaning, the term
may include information that is ancillary to a right otherwise

Computer software generally is protected by copyright laws


around the world. Under the Convention, whether payments for the

use or the right to use computer software are treated as


royalties or as business profits will depend on the facts and

circumstances of the transaction. Payments received in

connection with the transfer of so-called "shrink-wrap" computer

software are treated as business profits.


Paragraph 4 excludes from the scope of this Article royal

ties effectively connected with a permanent establishment or

fixed base of the beneficial owner in the source State. 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. The
rule in paragraph **9** of Article **7** (Business Profits) applies to

this paragraph as well, so that royalties attributable to a

permanent establishment or fixed base, but received after the

permanent establishment or fixed base no longer exists, will,

nevertheless, be taxable in the Contracting State in which the
permanent establishment or fixed base existed.

Paragraph **5** limits the benefits of this Article to royalty

amounts that reflect arm's-length transactions. It provides that


AUSTRIA **355**

Supp. No. **6(1998)**

**-36**

in cases involving special relationships between the payor and beneficial owner of a royalty, Article 12 applies only to the


extent of _royalty_ payments that would have been <sup>made absent such</sup>
special relationships. Any excess amount of royalties paid
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, and the tax imposed on the dividend will be subject to


the rate provided in subparagraph 2(a) of Article **10** (Dividends).

Paragraph **6** contains the source rule for royalty payments.

Under this rule, a royalty arises in a Contracting State to the

extent it is a payment **for** the use **of,** or the right to use,

rights or property within that State. This source rule is

relevant for the implementation of paragraph 2. If, for example,
a **U.S.** resident is the beneficial owner of a royalty paid **by** a

resident of Austria for the exhibition of a motion picture in

Austria, that royalty is sourced in Austria and is subject to a

10 percent withholding tax in Austria. If, however, the payment,


even if made **by** an Austrian resident, is for the exhibition of a

motion picture in Germany, or in the United States, the royalty would not be Austria source income, and would not be subject to


Austrian tax.

Notwithstanding the foregoing limitations on source State taxation of royalties, the saving clause of paragraph 4 of Article 1 (Personal Scope) permits the United States to tax its


citizens, subject to the special foreign tax credit rules of

paragraph 2 of Article 22 (Relief from Double Taxation), and its

residents as if the Convention had not come into effect. As with
all *benefits under this Convention, the granting of benefits
under this Article is subject to the requirements that the

beneficial owner of the royalty income qualify for benefits under

the provisions of Article **16** (Limitation on Benefits).

Article 13. GAINS