Tag: Article 12

ARTICLE 12 ROYALTIES
“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.
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 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 and the right or property in respect of which the royalties are paid is effectively connected with such permanent establishment. In such case the provisions of Article 7 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 payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.”

India vs Google India Private Limited, Oct. 2022, Income Tax Appellate Tribunal, 1513/Bang/2013, 1514/Bang/2013, 1515/Bang/2013, 1516/Bang/2013

India vs Google India Private Limited, Oct. 2022, Income Tax Appellate Tribunal, 1513/Bang/2013, 1514/Bang/2013, 1515/Bang/2013, 1516/Bang/2013

Google Ireland licenses Google AdWords technology to its subsidiary in India and several other countries across the world. The Tax Tribunal in India found that despite the duty of Google India to withhold tax at the time of payment to Google Ireland, no tax was withheld. This was considered tax evasion, and Google was ordered to pay USD 224 million. The case was appealed by Google to the High Court, where the case was remanded to the Income Tax Appellate Authority for re-examination. Judgement of the ITAT After re-examining the matter on the orders of the Karnataka High Court, the Income Tax Appellate Authority concluded that the payments made by the Google India to Google Ireland between 2007-08 and 2012-13 was not royalties and therefore not subject to withholding tax. Excerpts “30. On a consideration of all the above agreements and the facts on record, we find that none of the rights as per section 14(a)/(b) and section 30 of ... Read more
France vs Société Planet, May 2022, Conseil d'État, Case No 444451

France vs Société Planet, May 2022, Conseil d’État, Case No 444451

In view of its purpose and the comments made on Article 12 of the OECD Model Convention, the Conseil d’État found that Article 12(2) of the Franco-New Zealand tax treaty was applicable to French source royalties whose beneficial owner resided in New Zealand, even if the royalties had been paid to an intermediary company established in a third country. The Supreme Court thus set aside the previous 2020 Judgement of the Administrative Court of Appeal. The question of whether the company in New Zealand actually qualified as the beneficial owner of the royalties for the years in question was referred to the Court of Appeal. Excerpt “1. It is clear from the documents in the file submitted to the judges of the court of first instance that the company Planet, which carries on the business of distributing sports programmes to fitness clubs, was subject to reminders of withholding tax in respect of sums described as royalties paid to the companies ... Read more
Bulgaria vs CBS, March 2022, Supreme Administrative Court, Case No 3012

Bulgaria vs CBS, March 2022, Supreme Administrative Court, Case No 3012

By judgment of 22 May 2020, the Administrative Court set aside a tax assessment in which CBS International Netherlands B.V. had been denied reimbursement of withholding tax in the amount of BGN 156 830,27 related to royalties and license payments. An appeal was filed by the tax authorities with the Supreme Administrative Court. In the appeal the tax authorities held that the beneficial owner of the licence and royalty payments was not CBS International Netherlands B.V. but instead CBS CORPORATION, a company incorporated and domiciled in New York, USA. According to the tax authorities the main function of CBS International Netherlands B.V. was that of an intermediary between the end customers and the beneficial owner. This was further supported by the transfer pricing documentation, according to which the US company that bears the risk of the development activity, the market risk is borne equally by the two companies, and the only risks borne by the Dutch company are the currency, ... Read more
India vs Synamedia Limited, February 2022, Income Tax Appellate Tribunal - BANGALORE, Case No ITA No. 3350/Bang/2018

India vs Synamedia Limited, February 2022, Income Tax Appellate Tribunal – BANGALORE, Case No ITA No. 3350/Bang/2018

Synamedia Ltd. provides open end-to-end digital technology services to digital pay television platform operators. The company has expertise in the area of providing conditional access system, interactive systems and other software solutions as well as integration and support services for digital pay TV networks. For FY 2014-15 the company filed a tax return with nil income. The case was selected for a transfer pricing audit. The tax authorities in India accepted the arm’s length pricing determined by Synamedia, but some of the intra-group licence payments for software were considered subject to withholding taxes in India. Hence an assessment was issued. An appeal was filed by the company. Judgement of the Tax Appellate Tribunal The Tribunal decided in favor of Synamedia Ltd. and set aside the assessment. After analyzing the terms of the agreement the Tribunal concluded that the terms of agreement in the present case are similar to those considered by the Indian Supreme Court in the case of Engineering ... Read more
France vs IKEA, February 2022, CAA of Versailles, No 19VE03571

France vs IKEA, February 2022, CAA of Versailles, No 19VE03571

Ikea France (SNC MIF) had concluded a franchise agreement with Inter Ikea Systems BV (IIS BV) in the Netherlands by virtue of which it benefited, in particular, as a franchisee, from the right to operate the ‘Ikea Retail System’ (the Ikea concept), the ‘Ikea Food System’ (food sales) and the ‘Ikea Proprietary Rights’ (the Ikea trade mark) in its shops. In return, Ikea France paid Inter Ikea Systems BV a franchise fee equal to 3% of the amount of net sales made in France, which amounted to EUR 68,276,633 and EUR 72,415,329 for FY 2010 and 2011. These royalties were subject to the withholding tax provided for in the provisions of Article 182 B of the French General Tax Code, but under the terms of Article 12 of the Convention between France and the Netherlands: “1. Royalties arising in one of the States and paid to a resident of the other State shall be taxable only in that other State”, ... Read more
Czech Republic vs Avon Cosmetics Ltd, February 2022, Municipal Court, Case No 6 Af 36/2020 - 42

Czech Republic vs Avon Cosmetics Ltd, February 2022, Municipal Court, Case No 6 Af 36/2020 – 42

In 2016 the British company Avon Cosmetics Limited (ACL) became the sole licensor of intellectual property rights for Europe, Africa and the Middle East within the Avon Cosmetics Group and was authorised to issue sub-licences to other group companies, including the Czech subsidiary, Avon Cosmetics spol. s r.o.. ACL charged a fee for issuing a sub-licence equal to an agreed-upon percentage of net sales but was then contractually obliged to pay a similar fee to the US companies, Avon Products Inc. and Avon Internetional Operations Inc. ACL applied for relief from WHT on the royalty payments from the Czech subsidiary. The tax authorities concluded that ACL was not the beneficial owner of the royalty income but only an conduit or intermediary. The legal conditions for granting the exemption were not met. ACL did not obtain any real benefit from the royalty fees and was not authorised to freely decide on use of the income as it was contractually obliged to ... Read more

TPG2022 Chapter VI paragraph 6.13

The guidance contained in this chapter is intended to address transfer pricing matters exclusively. It is not intended to have relevance for other tax purposes. For example, the Commentary on Article 12 of the OECD Model Tax Convention contains a detailed discussion of the definition of royalties under that Article (paragraphs 8 to 19). The Article 12 definition of “royalties” is not intended to provide any guidance on whether, and if so at what price, the use or transfer of intangibles would be remunerated between independent parties. It is therefore not relevant for transfer pricing purposes. Moreover, the manner in which a transaction is characterised for transfer pricing purposes has no relevance to the question of whether a particular payment constitutes a royalty or may be subjected to withholding tax under Article 12. The concept of intangibles for transfer pricing purposes and the definition of royalties for purposes of Article 12 of the OECD Model Tax Convention are two different ... Read more
Kenya vs Seven Seas Technologies Ltd, December 2021, High Court of Kenya, Income Tax Appeal 8 of 2017 [2021] KEHC 358

Kenya vs Seven Seas Technologies Ltd, December 2021, High Court of Kenya, Income Tax Appeal 8 of 2017 [2021] KEHC 358

Seven Seas Technologies under a software license agreement purchased software from a US company – Callidus software – for internal use and for distribution to local customers. Following an audit, the tax authorities found that Seven Seas Technologies had not been paying withholding taxes on payments in respect of the software license agreement with Callidas. An assessment was issued according to which these payments were found to by a “consideration for the use and right to use copyright in the literary work of another person” as per section 2 of the Income Tax Act, thus subject to withholding tax under Section 35 (1)(b) of the Kenyan Income Tax Act. Seven Seas Technologies contested the assessment before the Tax Appeals Tribunal where, in a judgement issued 8 December 2016, the tribunal held that Seven Seas Technologies had acquired rights to copyright in software that is commercially exploited and that the company on that basis should have paid withholding tax. A decision ... Read more
Brazil vs AES SUL Distribuidora Gaúcha de Energia S/A, August 2021, Superior Tribunal de Justiça, CaseNº 1949159 - CE (2021/0219630-6)

Brazil vs AES SUL Distribuidora Gaúcha de Energia S/A, August 2021, Superior Tribunal de Justiça, CaseNº 1949159 – CE (2021/0219630-6)

AES SUL Distribuidora Gaúcha de Energia S/A is active in footwear industry. It had paid for services to related foreign companies in South Africa, Argentina, Canada, China, South Korea, Spain, France, Holland, Italy, Japan, Norway, Portugal and Turkey. The tax authorities were of the opinion that withholding tax applied to these payments, which they considered royalty, and on that basis an assessment was issued. Not satisfied with this assessment AES filed an appeal, which was allowed by the court of first instance. An appeal was then filed by the tax authorities with the Superior Tribunal. Judgement of the Superior Tribunal de Justiça The court upheld the decision of the court of first instance and dismissed the appeal of the tax authorities. Excerpts “Therefore, the income from the rendering of services paid to residents or domiciled abroad, in the cases dealt with in the records, is not subject to the levy of withholding income tax. The refund of amounts proved to ... Read more
India vs Engineering Analysis Centre of Excellence Private Limited, March 2021, Supreme Court, Case No 8733-8734 OF 2018

India vs Engineering Analysis Centre of Excellence Private Limited, March 2021, Supreme Court, Case No 8733-8734 OF 2018

At issue in the case of India vs. Engineering Analysis Centre of Excellence Private Limited, was whether payments for purchase of computer software to foreign suppliers or manufacturers could be characterised as royalty payments. The Supreme Court held that such payments could not be considered payments for use of the underlying copyrights/intangibles. Hence, no withholding tax would apply to these payments for the years prior to the 2012. Furthermore, the 2012 amendment to the royalty definition in the Indian tax law could not be applied retroactively, and even after 2012, the definition of royalty in Double Tax Treaties would still override the definition in Indian tax law. Excerpt from the conclusion of the Supreme Court “Given the definition of royalties contained in Article 12 of the DTAAs mentioned in paragraph 41 of this judgment , it is clear that there is no obligation on the persons mentioned in section 195 of the Income Tax Act to deduct tax at source, ... Read more
Bulgaria vs CBS, October 2020, Supreme Administrative Court, Case No 12349

Bulgaria vs CBS, October 2020, Supreme Administrative Court, Case No 12349

By judgment of 22 May 2020, the Administrative Court set aside a tax assessment in which CBS International Netherlands B.V. had been denied reimbursement of withholding tax related to royalties and license payments. An appeal was filed by the tax authorities with the Supreme Administrative Court. In the appeal the tax authorities held that the beneficial owner of the licence and royalty payments was not CBS International Netherlands B.V. but instead CBS CORPORATION, a company incorporated and domiciled in New York, USA. According to the tax authorities the main function of CBS International Netherlands B.V. was that of an intermediary between the end customers and the beneficial owner. This was further supported by the transfer pricing documentation, according to which the US company that bears the risk of the development activity, the market risk is borne equally by the two companies, and the only risks borne by the Dutch company are the currency, operational and credit risks, which in turn ... Read more
Spain vs COLGATE PALMOLIVE ESPAÑA, S.A., September 2020, Supreme Court, Case No 1996/2019 ECLI:ES:TS:2020:3062

Spain vs COLGATE PALMOLIVE ESPAÑA, S.A., September 2020, Supreme Court, Case No 1996/2019 ECLI:ES:TS:2020:3062

The tax authorities had issued an assessment according to which royalty payments from Colgate Palmolive España S.A (CP España) to Switzerland were not considered exempt from withholding taxes under the Spanish-Swiss DTA since the company in Switzerland was not the Beneficial Owner of the royalty-income. The assessment was set aside by the National Court in a decision issued in November 2018. The Supreme court were to clarify the conformity with the law of the judgement of the Audiencia Nacional, following in the wake of the order of admission which, in a similar manner to that proposed in appeal no. 5448/2018, ruled in favour of the taxpayer on 3 February last, asks the following questions. a) to clarify the objective and temporal limits of the so-called dynamic interpretation of the DTAs signed by the Kingdom of Spain on the basis of the OECD Model Convention – as in this case the Spanish-Swiss DTA – when, despite the fact that the concept ... Read more
Peru vs. "TELE SA", July 2020, Tax Court, Case No 03306-9-2020

Peru vs. “TELE SA”, July 2020, Tax Court, Case No 03306-9-2020

“TELE SA” had applied a 15% withholding tax rate to lease payments for telecommunications equipment purportedly provided by a Chilean company that had been established by the Mexican parent of the “TELE” group. TELE SA claimed the payments qualified as royalties under Article 12 of the Peru-Chile double tax treaty. The Peruvian Tax Authority found the reduced 15 % rate did not apply to the lease payments because the Chilean entity was not the beneficial owner of the royalty payments. Hence an assessment was issued where withholding taxes had been calculated using a 30% rate under Peruvian domestic tax legislation. An appeal was filed with the Tax Court. Judgement of the Tax Court The Tax Court upheld the decision of the tax authorities and dismissed the appeal of “TELE SA”. The 15% withholding tax rate for royalty provided for in Article 12 of the double tax treaty between Peru and Chile did not apply to the payments as the Chilean ... Read more
France vs Société Planet, July 2020, CAA, Case No 18MA04302

France vs Société Planet, July 2020, CAA, Case No 18MA04302

The Administrative Court of Appeal (CAA) set aside a judgement of the administrative court and upheld the tax authorities claims of withholding taxes on royalties paid by Société Planet to companies in Belgium and Malta irrespective of the beneficial owner of those royalties being a company in New Zealand. Hence, Article 12(2) of the Franco-New Zealand tax treaty was not considered applicable to French source royalties whose beneficial owner resided in New Zealand, where they had been paid to an intermediary company established in a third country. Click here for English translation Click here for other translation France vs Planet July 2020 CAA 18MA04302 ... Read more
Spain vs COLGATE PALMOLIVE ESPAÑA, S.A., November 2018, Audiencia National, Case No 643/2015 - ECLI:EN:AN:2018:5203

Spain vs COLGATE PALMOLIVE ESPAÑA, S.A., November 2018, Audiencia National, Case No 643/2015 – ECLI:EN:AN:2018:5203

The tax authorities had issued an assessment according to which royalty payments from Colgate Palmolive España S.A. (CP España) to Switzerland were not considered exempt from withholding taxes under the Spanish-Swiss DTA since the company in Switzerland was not the Beneficial Owner of the royalty-income. Judgement of the National Court The court held in favour of Colgate and set aside the decision of the tax authorities. SP vs Palmolive SAN_1128_2018 ENG NW”>Click here for English Translation Click here for other translation SAN_5203_2018 ... Read more

TPG2017 Chapter VI paragraph 6.13

The guidance contained in this chapter is intended to address transfer pricing matters exclusively. It is not intended to have relevance for other tax purposes. For example, the Commentary on Article 12 of the OECD Model Tax Convention contains a detailed discussion of the definition of royalties under that Article (paragraphs 8 to 19). The Article 12 definition of “royalties” is not intended to provide any guidance on whether, and if so at what price, the use or transfer of intangibles would be remunerated between independent parties. It is therefore not relevant for transfer pricing purposes. Moreover, the manner in which a transaction is characterised for transfer pricing purposes has no relevance to the question of whether a particular payment constitutes a royalty or may be subjected to withholding tax under Article 12. The concept of intangibles for transfer pricing purposes and the definition of royalties for purposes of Article 12 of the OECD Model Tax Convention are two different ... Read more
Canada vs VELCRO CANADA INC., February 2012, Tax Court, Case No 2012 TCC 57

Canada vs VELCRO CANADA INC., February 2012, Tax Court, Case No 2012 TCC 57

The Dutch company, Velcro Holdings BV (“VHBV”), licensed IP from an affiliated company in the Dutch Antilles, Velcro Industries BV (“VIBV”), and sublicensed this IP to a Canadian company, Velcro Canada Inc. (VCI). VHBV was obliged to pay 90% of the royalties received from VCI. within 30 days after receipt to VIBV. At issue was whether VHBV qualified as Beneficial Owner of the royalty payments from VCI and consequently would be entitled to a reduced withholding tax – from 25% (the Canadian domestic rate) to 10% (the rate under article 12 of the treaty between Canada and the Netherlands). The tax authorities considered that VHBV did not qualify as Beneficial Owner and denied application of the reduced withholding tax rate. Judgement of the Tax Court The court set aside the decision of the tax authorities and decided in favor of VCI. Excerpts: “VHBV obviously has some discretion based on the facts as noted above regarding the use and application of ... Read more