© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
F11. Royalties
(Article 12)
ARTICLE 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.
(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.
ROYALTY
- Payment for the outright transfer of a right is not consideration for the use of that right
"[103]...Further, the 2017 Commentaries make clear that where payments are made in exchange for an outright transfer of the rights, those payments do not fall within Article 12 because "the payment is not in consideration 'for the use of, or the right to use' that property and cannot therefore represent a royalty" (para 8.2). The payment will instead be a business profit within Article 7 or a capital gain within Article 13. The 2017 Commentaries go on to explain why this is, at para 16:
"That follows from the fact that where the ownership of rights has been alienated, the consideration cannot be for the use of the rights. The essential character of the transaction as an alienation cannot be altered by the form of the consideration, the payment of the consideration in instalments or, in the view of most countries, by the fact that the payments are related to a contingency." (HMRC v. Royal Bank of Canada [2025] UKSC 2, Lady Rose)
Payment as consideration for use/right to use copyright etc.
(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." (Model Article 12)
- Payment based on number of times a right is used, but made to someone who does not own the right, not a royalty
"[109] I agree that this interpretation derives some support from the similar wording of Article 12 of the UK/Canada Convention. Article 12(4) defines "royalties" as any payment received "as a consideration for the use of, or the right to use, any copyright, patent, trade mark...". Para 8 of the Commentaries on Article 12 states that the Article includes both payments made under a licence and also payments made to compensate the owner for an infringement of the right. But it does not cover a payment that "whilst based on the number of times a right belonging to someone is used, are made to someone else who does not himself own the right or the right to use it". The Commentaries give as an example of the distinction being drawn a situation where an artist receives both a fee for performing and also, if the performance is recorded, a royalty for each sale of the recording. The performance fee would fall under Article 17 which deals with income of performers and athletes but royalties for each sale of the recording will fall within Article 12 where the artist is the holder of the copyright. But where the copyright in the sound recording belongs to a third party, the payments made under the contract fall under Articles 7 or 17 rather than under Article 12 even if the payments are contingent on the sale of the recordings. Further, the 2017 Commentaries make clear that where payments are made in exchange for an outright transfer of the rights, those payments do not fall within Article 12 because "the payment is not in consideration 'for the use of, or the right to use' that property and cannot therefore represent a royalty" (para 8.2). The payment will instead be a business profit within Article 7 or a capital gain within Article 13..." (HMRC v. Royal Bank of Canada [2025] UKSC 2, Lady Rose)
RELATIONSHIP TO OTHER ARTICLES
Article 17
- Fee for both performance and sale of recording of performance: split between performance income and royalty income (unless performer does not own rights)
"[109] ... The Commentaries give as an example of the distinction being drawn a situation where an artist receives both a fee for performing and also, if the performance is recorded, a royalty for each sale of the recording. The performance fee would fall under Article 17 which deals with income of performers and athletes but royalties for each sale of the recording will fall within Article 12 where the artist is the holder of the copyright. But where the copyright in the sound recording belongs to a third party, the payments made under the contract fall under Articles 7 or 17 rather than under Article 12 even if the payments are contingent on the sale of the recordings. Further, the 2017 Commentaries make clear that where payments are made in exchange for an outright transfer of the rights, those payments do not fall within Article 12 because "the payment is not in consideration 'for the use of, or the right to use' that property and cannot therefore represent a royalty" (para 8.2). The payment will instead be a business profit within Article 7 or a capital gain within Article 13..." (HMRC v. Royal Bank of Canada [2025] UKSC 2, Lady Rose)