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HMRC internal manual

International Manual

Description of double taxation agreements: Royalties

As with interest Articles, royalties Articles provide that either

  • royalties are only taxable in the country of residence of the beneficial owner (in some agreements it is a condition that the recipient of the royalty must be subject to tax in his own country on that royalty), or
  • royalties arising to a resident of one country may be taxed by that country. They may also be taxed by the country in which they arise but at a rate not exceeding a specified percentage if the recipient is the beneficial owner of the royalties (in some agreements it is a condition that the recipient of the royalty must be subject to tax in his own country on the royalty).

See INTM162090 for a note on the meaning of `subject to tax’.

The definition of royalties for the purposes of the Article is very wide. It includes payment of any kind for the use of, or the right to use, any copyright of literary, artistic or scientific work, any patent, trademark, plan, secret formula or process, design or models, or for information concerning industrial commercial or scientific experience. The last phrase includes payments for `know-how’. The commentary on the 2008 update of the OECD Model Double Taxation Convention contains a very useful expansion of some of the problems encountered in this area. The material is in paragraphs 11 to 11.6 of the commentary in relation to Article 12. Some agreements specifically include payments for the use of, or the right to use, cinematograph films and films or tapes for radio or television broadcasting.

Payments for the use of, or the right to use, industrial, commercial, or scientific equipment are also included in the definition in many agreements; where they are not included such payments fall within the terms of the business profits Article and will not be taxable in the source country unless they form part of the income of a permanent establishment there.

In a few agreements the definition of royalties is extended to cover technical and management fees, but where the taxation of such fees is specifically dealt with in a double taxation agreement, it is normally the subject of a separate Article (see INTM153140).

Royalties Articles contain provisions similar to those in the dividend and interest Articles relating to:

  • the deeming of royalties to arise in the country of which the payer is a resident with special rules for permanent establishments, and
  • royalties `effectively connected’ with a permanent establishment or fixed base which the recipient has in the other country, and
  • royalties paid where there is a special relationship between the payer and the recipient.

INTM153110 discusses the concept of `effectively connected’ income. In the context of royalties it should be noted that a royalty may be `effectively connected’ with a permanent establishment if the intellectual property right from which it is derived was acquired out of the funds of the branch. A royalty may also be `effectively connected’ if the branch played an active part in the creation and/or exploitation of the intellectual property right, notwithstanding that the right may not be regarded as an asset of the branch.

The United Kingdom will give a United Kingdom resident credit either for the tax deducted from the gross royalties or for the tax calculated in accordance with the business profits or independent personal services Article. See INTM163090 for guidance concerning the amount of credit relief due.

Claims to exemption from, or to a reduced rate of, United Kingdom tax by residents of the other country are made to the Large Business Service Double Taxation Treaty Team, Barkley House, Nottingham who may authorise the payer not to deduct tax or to deduct tax at the rate specified in the article