LESSON 3 - PART 3 - ARTICLE 12 - ROYALTIES

Article 12 of the OECD Model Treaty provides that Royalty income is taxable only in the State where the recipient is a tax resident. In contrast the UN Model provides for a rate of withholding tax to be determined by bilateral negotiation. Each of the NAFTA treaties impose a withholding tax on royalty income .The Canada-US Treaty, Article XII provides that “[r]oyalties arising in the Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.” However, the royalty may also be taxed in the “source” State. If the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed 10 %of the gross amount of the royalties. This withholding tax rate is the same for all of the NAFTA Treaties.

The OECD Model defines “royalties” as payments of any kind received as consideration for the use of or the right to use:

The definition of royalties can differ significantly depending on the particular Treaty. This is especially true in the case of the Canada-U.S. Treaty.