Text of OECD 1977 Model Article 12

Royalties

• 1 Royalties arising in a Contracting State and paid to a resident of the other Contracting State shall be taxable only in that other State if such resident is the beneficial owner of the royalties.
• 2 The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience.
• 3 The provisions of paragraph 1 shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.
• 4 Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payment shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.

Where words are in bold type they indicate a change from the 1963 Model text. Apart from quite minor changes of wording the 1977 text differs from the 1963 version in these ways:

Corresponding to the changes in the two preceding Articles relating to dividends and interest, the relief given by the source country is expressed to depend on the royalties being in the beneficial ownership of the resident of the other country to whom they accrue.

Likewise, a fixed base where the beneficial owner of the royalties performs independent personal services is mentioned in paragraph 3 on the same footing as a permanent establishment. However, the deletion of Article 14 from the Model in 2000 has meant the deletion from Paragraph 3 of

• (i) "or performs in that State independent personal services" and
• (ii) "or Article 14 as the case may be".

The 1992 text differs from the 1977 text only in deleting from paragraph 2 words including within the definition of "royalty" payments received as a consideration for the use of, or the right to use, industrial, commercial or scientific equipment.

The United Nations Model makes some alterations and additions to the OECD text but retains the 1977 OECD references to independent personal services and also continues to define royalties (paragraph 3) to include payments received in consideration for the use of or the right to used industrial, commercial or scientific equipment.

Paragraph 1 of the Model is replaced as follows:

• 1 Royalties arising in a Contracting State and paid to a resident of the other State may be taxed in that other State.
• 2 However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State [but if the recipient is the beneficial owner of the royalties] but if the beneficial owner of the royalties is a resident of the other Contracting State the tax so charged shall not exceed ... per cent (the percentage to be established through bilateral negotiations) of the gross amount of the royalties. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. [The words in square brackets [] were replaced by the words following them in the text by the 2001 UN Model].

The counterpart of OECD Model paragraph 2 adds after "cinematograph films" the words "or films or tapes used for radio or television broadcasting".

The counterpart of OECD Model paragraph 3 substitutes at the end of the first sentence the words "(a) such permanent establishment or fixed base, or with (b) business activities referred to under (c) of paragraph 1 of Article 7".

There is an additional paragraph:

5 Royalties shall be deemed to arise in a Contracting State where the payer is [that State itself, a political subdivision, a local authority or] a resident of that State. Where, however, the person paying the royalties, whether he is a resident of that State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties was incurred, and such royalties are borne by such permanent establishment or fixed base, then such royalties shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. [Words in square brackets deleted by the 2001 amendment of the Model.]

Discussion of Article 12

Model Article 12 Summary