Royalties – Article 12 OECD MC
Royalties are the remuneration for the temporary use of immaterial property 1
Step 1: para 1 & 2 (exclusive taxation in residence state)
Art. 12(1) -> ‘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’.
o Elements:
A. Defining ‘Royalty’ payments
- In order to determine whether Art. 12 applies, it is crucial to determine whether the
payment2 made is to be defined as a royalty. If not, Art. 12 is NOT applicable.
- Art. 12(2) defines the concept of ‘royalties’:
(i) Entitlement to use34
o copyrights
o patents
o trade marks
o design or model, plans, secret formula or process
o information concerning industrial, commercial or scientific experience
(know how)
I. Important: difference between a sale and licensing -> given that Art.
12(2) specifies that a royalty presupposes the entitlement to use, it is
important to differentiate between ‘alienating’ (sale) and ‘letting’
(licensing):
(i) Sale -> A sale is characterized by:
a. transfer of the full ownership (ph. 8.2)5
o Where the ownership has been alienated, the
consideration cannot be for the use of the rights
b. unlimited in time
If the transaction is a sale (rather than a license) -> Art. 7 or 13 will
probably apply. NOT Art. 12!! (ph. 8.2)
(ii) Licence -> licensing is characterised by:
a. The separation of a right;
b. A payment
o For the use of the property, or
o The right to use the property
c. Temporary duration (ie limited in time)
o Different if property will be consumed
II. Important: difference between royalties and service fees
(i) Service fees -> a payment cannot be said to be ‘for the use of, or
the right to use’ a design, model or plan if the payment is for the
DEVELOPMENT of a design, model or plan that does NOT already
exist (ph. 10.2) Art. 7 applies
(ii) Royalties -> if the owner of a PREVIOUSLY-DEVELOPED plan
merely grants someone the right to use/modify/reproduce these
1
IMPORTANT: the leasing of industrial, commercial or scientific EQUIPMENT is NOT covered by Art. 12 (ph. 9) Arts.
5 and 7 apply
2
Payment -> defined in ph. 8.3
3
Irrelevant whether registered or not (ph. 8)
4
NOT (anymore) included: leasing (use of industrial, commercial or scientific (ICS) equipment (ph. 9: business profit)
(BUT: Article 12(3) UN-Model)
5
Payment may be in installments
Royalties are the remuneration for the temporary use of immaterial property 1
Step 1: para 1 & 2 (exclusive taxation in residence state)
Art. 12(1) -> ‘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’.
o Elements:
A. Defining ‘Royalty’ payments
- In order to determine whether Art. 12 applies, it is crucial to determine whether the
payment2 made is to be defined as a royalty. If not, Art. 12 is NOT applicable.
- Art. 12(2) defines the concept of ‘royalties’:
(i) Entitlement to use34
o copyrights
o patents
o trade marks
o design or model, plans, secret formula or process
o information concerning industrial, commercial or scientific experience
(know how)
I. Important: difference between a sale and licensing -> given that Art.
12(2) specifies that a royalty presupposes the entitlement to use, it is
important to differentiate between ‘alienating’ (sale) and ‘letting’
(licensing):
(i) Sale -> A sale is characterized by:
a. transfer of the full ownership (ph. 8.2)5
o Where the ownership has been alienated, the
consideration cannot be for the use of the rights
b. unlimited in time
If the transaction is a sale (rather than a license) -> Art. 7 or 13 will
probably apply. NOT Art. 12!! (ph. 8.2)
(ii) Licence -> licensing is characterised by:
a. The separation of a right;
b. A payment
o For the use of the property, or
o The right to use the property
c. Temporary duration (ie limited in time)
o Different if property will be consumed
II. Important: difference between royalties and service fees
(i) Service fees -> a payment cannot be said to be ‘for the use of, or
the right to use’ a design, model or plan if the payment is for the
DEVELOPMENT of a design, model or plan that does NOT already
exist (ph. 10.2) Art. 7 applies
(ii) Royalties -> if the owner of a PREVIOUSLY-DEVELOPED plan
merely grants someone the right to use/modify/reproduce these
1
IMPORTANT: the leasing of industrial, commercial or scientific EQUIPMENT is NOT covered by Art. 12 (ph. 9) Arts.
5 and 7 apply
2
Payment -> defined in ph. 8.3
3
Irrelevant whether registered or not (ph. 8)
4
NOT (anymore) included: leasing (use of industrial, commercial or scientific (ICS) equipment (ph. 9: business profit)
(BUT: Article 12(3) UN-Model)
5
Payment may be in installments
