COMMENTARY ON Article 12

CONCERNING THE TAXATION OF ROYALTIES

Preliminary remarks1. In principle, royalties in respect of licences to use patents and similar property and similar payments are income to the recipient from a letting. The letting may be granted in connection with an enterprise (e.g.the use of literary copyright granted by a publisher or the use of a patent granted by the inventor) or quite independently of any activity of the grantor (e.g.use of a patent granted by the inventor’s heirs).(Amended on 29 April 2000 see History)

2. Certain countries do not allow royalties paid to be deducted for the purposes of the payer’s tax unless the recipient also resides in the same State or is taxable in that State. Otherwise they forbid the deduction. The question whether the deduction should also be allowed in cases where the royalties are paid by a resident of a Contracting State to a resident of the other State, is dealt with in paragraph 4 of Article 24.(Amended on 23 July 1992 see History)

Commentary on the provisions of the ArticleParagraph 13. Paragraph 1 lays down the principle of exclusive taxation of royalties in the State of the beneficial owner’s residence. The only exception to this principle is that made in the cases dealt with in paragraph 3.(Renumbered and amended on 11 April 1977 see History)

4. The requirement of beneficial ownership was introduced in paragraph 1 of Article 12 to clarify how the Article applies in relation to payments made to intermediaries. It makes plain that the State of source is not obliged to give up taxing rights over royalty income merely because that income was paid direct to a resident of a State with which the State of source had concluded a convention. The term “beneficial owner” is therefore not used in a narrow technical sense (such as the meaning that it has under the trust law of many common law countries[^57] ), rather, it should be understood in its context and in light of the object and purposes of the Convention, including avoiding double taxation and the prevention of fiscal evasion and avoidance.(Amended on 15 July 2014 see History)

4.1 Relief or exemption in respect of an item of income is granted by the State of source to a resident of the other Contracting State to avoid in whole or in part the double taxation that would otherwise arise from the concurrent taxation of that income by the State of residence. Where an item of income is paid to a resident of a Contracting State acting in the capacity of agent or nominee it would be inconsistent with the object and purpose of the Convention for the State of source to grant relief or exemption merely on account of the status of the direct recipient of the income as a resident of the other Contracting State. The direct recipient of the income in this situation qualifies as a resident but no potential double taxation arises as a consequence of that status since the recipient is not treated as the owner of the income for tax purposes in the State of residence.(Amended on 15 July 2014 see History)

4.2 It would be equally inconsistent with the object and purpose of the Convention for the State of source to grant relief or exemption where a resident of a Contracting State, otherwise than through an agency or nominee relationship, simply acts as a conduit for another person who in fact receives the benefit of the income concerned. For these reasons, the report from the Committee on Fiscal Affairs entitled “Double Taxation Conventions and the Use of Conduit Companies”[^58] concludes that a conduit company cannot normally be regarded as the beneficial owner if, though the formal owner, it has, as a practical matter, very narrow powers which render it, in relation to the income concerned, a mere fiduciary or administrator acting on account of the interested parties.(Added on 15 July 2014 see History)

4.3 In these various examples (agent, nominee, conduit company acting as a fiduciary or administrator), the direct recipient of the royalties is not the “beneficial owner” because that recipient’s right to use and enjoy the royalties is constrained by a contractual or legal obligation to pass on the payment received to another person. Such an obligation will normally derive from relevant legal documents but may also be found to exist on the basis of facts and circumstances showing that, in substance, the recipient clearly does not have the right to use and enjoy the royalties unconstrained by a contractual or legal obligation to pass on the payment received to another person. This type of obligation would not include contractual or legal obligations that are not dependent on the receipt of the payment by the direct recipient such as an obligation that is not dependent on the receipt of the payment and which the direct recipient has as a debtor or as a party to financial transactions, or typical distribution obligations of pension schemes and of collective investment vehicles entitled to treaty benefits under the principles of paragraphs 6.8 to 6.34 of the Commentary on Article 1. Where the recipient of royalties does have the right to use and enjoy the royalties unconstrained by a contractual or legal obligation to pass on the payment received to another person, the recipient is the “beneficial owner” of these royalties. It should also be noted that Article 12 refers to the beneficial owner of royalties as opposed to the owner of the right or property in respect of which the royalties are paid, which may be different in some cases.(Added on 15 July 2014 see History)

4.4 The fact that the recipient of royalties is considered to be the beneficial owner of these royalties does not mean, however, that the provisions of paragraph 1 must automatically be applied. The benefit of these provisions should not be granted in cases of abuse (see also paragraph 7 below). As explained in the section on “Improper use of the Convention” in the Commentary on Article 1, there are many ways of addressing conduit company and, more generally, treaty shopping situations. These include specific anti-abuse provisions in treaties, general anti-abuse rules and substance-over-form or economic substance approaches. Whilst the concept of “beneficial owner” deals with some forms of tax avoidance (i.e.those involving the interposition of a recipient who is obliged to pass on the royalties to someone else), it does not deal with other cases of treaty shopping and must not, therefore, be considered as restricting in any way the application of other approaches to addressing such cases.(Added on 15 July 2014 see History)

4.5 The above explanations concerning the meaning of “beneficial owner” make it clear that the meaning given to this term in the context of the Article must be distinguished from the different meaning that has been given to that term in the context of other instruments[^59] that concern the determination of the persons (typically the individuals) that exercise ultimate control over entities or assets. That different meaning of “beneficial owner” cannot be applied in the context of the Convention. Indeed, that meaning, which refers to natural persons (i.e.individuals), cannot be reconciled with the express wording of subparagraph 2 a) of Article 10, which refers to the situation where a company is the beneficial owner of a dividend. The term beneficial owner was intended to address difficulties arising from the use of the words “paid to”, which are found in paragraph 1 of Articles 10 and 11 and were similarly used in paragraph 1 of Article 12 of the 1977 Model Double Taxation Convention, in relation to dividends, interest and royalties rather than difficulties related to the ownership of the shares, debt-claims, property or rights with respect these dividends, interest or royalties are paid. For that reason, it would be inappropriate, in the context of these articles, to consider a meaning developed in order to refer to the individuals who exercise “ultimate effective control over a legal person or arrangement”.[^60] (Added on 15 July 2014 see History)

4.6 Subject to other conditions imposed by the Article, the exemption from taxation in the State of source remains available when an intermediary, such as an agent or nominee located in a Contracting State or in a third State, is interposed between the beneficiary and the payer, in those cases where the beneficial owner is a resident of the other Contracting State (the text of the Model was amended in 1997 to clarify this point, which has been the consistent position of all member countries).(Renumbered and amended on 15 July 2014 see History)

5. The Article deals only with royalties arising in a Contracting State and beneficially owned by a resident of the other Contracting State. It does not, therefore, apply to royalties arising in a third State as well as to royalties arising in a Contracting State which are attributable to a permanent establishment which an enterprise of that State has in the other Contracting State (for these cases see paragraphs 4to 6 of the Commentary on Article 21). Procedural questions are not dealt with in this Article. Each State should be able to apply the procedure provided in its own law. Specific questions arise with triangular cases (see paragraph 71 of the Commentary on Article 24).(Amended on 17 July 2008 see History)

6. The paragraph does not specify whether or not the exemption in the State of source should be conditional upon the royalties being subject to tax in the State of residence. This question can be settled by bilateral negotiations.(Renumbered and amended on 11 April 1977 see History)

7. Attention is drawn generally to the following case: the beneficial owner of royalties arising in a Contracting State is a company resident in the other Contracting State; all or part of its capital is held by shareholders resident outside that other State; its practice is not to distribute its profits in the form of dividends; and it enjoys preferential taxation treatment (private investment company, base company). The question may arise whether in the case of such a company it is justifiable to allow in the State of source of the royalties the tax exemption which is provided in paragraph 1. It may be appropriate, when bilateral negotiations are being conducted, to agree upon special exceptions to the taxing rule laid down in this Article, in order to define the treatment applicable to such companies.(Renumbered and amended on 11 April 1977 see History)

Paragraph 28. Paragraph 2 contains a definition of the term “royalties”. These relate, in general, to rights or property constituting the different forms of literary and artistic property, the elements of intellectual property specified in the text and information concerning industrial, commercial or scientific experience. The definition applies to payments for the use of, or the entitlement to use, rights of the kind mentioned, whether or not they have been, or are required to be, registered in a public register. The definition covers both payments made under a license and compensation which a person would be obliged to pay for fraudulently copying or infringing the right.(Amended on 17 July 2008 see History)

8.1 The definition does not, however, apply to payments 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 (see, for instance, paragraph 18 below).(Replaced on 17 July 2008 see History)

8.2 Where a payment is in consideration for the transfer of the full ownership of an element of property referred to in the definition, the payment is not in consideration “for the use of, or the right to use” that property and cannot therefore represent a royalty. As noted in paragraphs 15 and 16 below as regards software, difficulties can arise in the case of a transfer of rights that could be considered to form part of an element of property referred to in the definition where these rights are transferred in a way that is presented as an alienation. For example, this could involve the exclusive granting of all rights to an intellectual property for a limited period or all rights to the property in a limited geographical area in a transaction structured as a sale. Each case will depend on its particular facts and will need to be examined in the light of the national intellectual property law applicable to the relevant type of property and the national law rules as regards what constitutes an alienation but in general, if the payment is in consideration for the alienation of rights that constitute distinct and specific property (which is more likely in the case of geographically-limited than time limited rights), such payments are likely to be business profits within Article 7 or a capital gain within Article 13 rather than royalties within Article 12. 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.(Added on 17 July 2008 see History)

8.3 The word “payment”, used in the definition, has a very wide meaning since the concept of payment means the fulfilment of the obligation to put funds at the disposal of the creditor in the manner required by contract or by custom.(Added on 17 July 2008 see History)

8.4 As a guide, certain explanations are given below in order to define the scope of Article 12 in relation to that of other Articles of the Convention, as regards, in particular, the provision of information.(Added on 17 July 2008 see History)

8.5 Where information referred to in paragraph 2 is supplied or where the use or the right to use a type of property referred to in that paragraph is granted, the person who owns that information or property may agree not to supply or grant to anyone else that information or right. Payments made as consideration for such an agreement constitute payments made to secure the exclusivity of that information or an exclusive right to use that property, as the case may be. These payments being payments “of any kind received as a consideration for ... the right to use” the property “or for information”, fall under the definition of royalties.(Renumbered on 17 July 2008 see History)

9. Whilst the definition of the term “royalties” in the 1963 Draft Convention and the 1977 Model Convention included payments “for the use of, or the right to use, industrial, commercial or scientific equipment”, the reference to these payments was subsequently deleted from the definition. Given the nature of income from the leasing of industrial, commercial or scientific equipment, including the leasing of containers, the Committee on Fiscal Affairs decided to exclude income from such leasing from the definition of royalties and, consequently, to remove it from the application of Article 12 in order to make sure that it would fall under the rules for the taxation of business profits, as defined in Articles 5 XREFSTYLE=AndNumber.(Replaced on 23 July 1992 see History)

9.1 Satellite operators and their customers (including broadcasting and telecommunication enterprises) frequently enter into “transponder leasing” agreements under which the satellite operator allows the customer to utilise the capacity of a satellite transponder to transmit over large geographical areas. Payments made by customers under typical “transponder leasing” agreements are made for the use of the transponder transmitting capacity and will not constitute royalties under the definition of paragraph 2: these payments are not made in consideration for the use of, or right to use, property, or for information, that is referred to in the definition (they cannot be viewed, for instance, as payments for information or for the use of, or right to use, a secret process since the satellite technology is not transferred to the customer). As regards treaties that include the leasing of industrial, commercial or scientific (ICS) equipment in the definition of royalties, the characterisation of the payment will depend to a large extent on the relevant contractual arrangements. Whilst the relevant contracts often refer to the “lease” of a transponder, in most cases the customer does not acquire the physical possession of the transponder but simply its transmission capacity: the satellite is operated by the lessor and the lessee has no access to the transponder that has been assigned to it. In such cases, the payments made by the customers would therefore be in the nature of payments for services, to which Article 7 applies, rather than payments for the use, or right to use, ICS equipment. A different, but much less frequent, transaction would be where the owner of the satellite leases it to another party so that the latter may operate it and either use it for its own purposes or offer its data transmission capacity to third parties. In such a case, the payment made by the satellite operator to the satellite owner could well be considered as a payment for the leasing of industrial, commercial or scientific equipment. Similar considerations apply to payments made to lease or purchase the capacity of cables for the transmission of electrical power or communications (e.g.through a contract granting an indefeasible right of use of such capacity) or pipelines (e.g.for the transportation of gas or oil).(Added on 22 July 2010 see History)

9.2 Also, payments made by a telecommunications network operator to another network operator under a typical “roaming” agreement (see paragraph 9.1 of the Commentary on Article 5) will not constitute royalties under the definition of paragraph 2 since these payments are not made in consideration for the use of, or right to use, property, or for information, referred to in the definition (they cannot be viewed, for instance, as payments for the use of, or right to use, a secret process since no secret technology is used or transferred to the operator). This conclusion holds true even in the case of treaties that include the leasing of industrial, commercial or scientific (ICS) equipment in the definition of royalties since the operator that pays a charge under a roaming agreement is not paying for the use, or the right to use, the visited network, to which it does not have physical access, but rather for the telecommunications services provided by the foreign network operator.(Added on 22 July 2010 see History)

9.3 Payments for the use of, or the right to use, some or all of part of the radio frequency spectrum (e.g.pursuant to a so-called “spectrum license” that allows the holder to transmit media content over designated frequency ranges of the electromagnetic spectrum) do not constitute payments for the use of, or the right to use, property, or for information, that is referred in the definition of royalties in paragraph 2. This conclusion holds true even in the case of treaties that include the leasing of industrial, commercial or scientific (ICS) equipment in the definition of royalties since the payment is not for the use, or the right to use, any equipment.(Added on 22 July 2010 see History)

10. Rents in respect of cinematograph films are also treated as royalties, whether such films are exhibited in cinemas or on the television. It may, however, be agreed through bilateral negotiations that rents in respect of cinematograph films shall be treated as business profits and, in consequence, subjected to the provisions of Articles 7 XREFSTYLE=AndNumber.(Amended on 29 April 2000 see History)

10.1 Payments that are solely made in consideration for obtaining the exclusive distribution rights of a product or service in a given territory do not constitute royalties as they are not made in consideration for the use of, or the right to use, an element of property included in the definition. These payments, which are best viewed as being made to increase sales receipts, would rather fall under Article 7. An example of such a payment would be that of a distributor of clothes resident in one Contracting State who pays a certain sum of money to a manufacturer of branded shirts, who is a resident of the other Contracting State, as consideration for the exclusive right to sell in the first State the branded shirts manufactured abroad by that manufacturer. In that example, the resident distributor does not pay for the right to use the trade name or trade mark under which the shirts are sold; he merely obtains the exclusive right to sell in his State of residence shirts that he will buy from the manufacturer.(Added on 17 July 2008 see History)

10.2 A payment cannot be said to be “for the use of, or the right to use” a design, model or plan if the payment is for the development of a design, model or plan that does not already exist. In such a case, the payment is made in consideration for the services that will result in the development of that design, model or plan and would thus fall under Article 7. This will be the case even if the designer of the design, model or plan (e.g.an architect) retains all rights, including the copyright, in that design, model or plan. Where, however, the owner of the copyright in previously-developed plans merely grants someone the right to modify or reproduce these plans without actually performing any additional work, the payment received by that owner in consideration for granting the right to such use of the plans would constitute royalties.(Added on 17 July 2008 see History)

11. In classifying as royalties payments received as consideration for information concerning industrial, commercial or scientific experience, paragraph 2 is referring to the concept of “know-how”. Various specialist bodies and authors have formulated definitions of know-how. The words “payments … for information concerning industrial, commercial or scientific experience” are used in the context of the transfer of certain information that has not been patented and does not generally fall within other categories of intellectual property rights. It generally corresponds to undivulged information of an industrial, commercial or scientific nature arising from previous experience, which has practical application in the operation of an enterprise and from the disclosure of which an economic benefit can be derived. Since the definition relates to information concerning previous experience, the Article does not apply to payments for new information obtained as a result of performing services at the request of the payer.(Amended on 17 July 2008 see History)

11.1 In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public. It is recognised that the grantor is not required to play any part himself in the application of the formulas granted to the licensee and that he does not guarantee the result thereof.(Added on 28 January 2003 see History)

11.2 This type of contract thus differs from contracts for the provision of services, in which one of the parties undertakes to use the customary skills of his calling to execute work himself for the other party. Payments made under the latter contracts generally fall under Article 7.(Added on 28 January 2003 see History)

11.3 The need to distinguish these two types of payments,i.e.payments for the supply of know-how and payments for the provision of services, sometimes gives rise to practical difficulties. The following criteria are relevant for the purpose of making that distinction:

• Contracts for the supply of know-how concern information of the kind described in paragraph 11 that already exists or concern the supply of that type of information after its development or creation and include specific provisions concerning the confidentiality of that information.

• In the case of contracts for the provision of services, the supplier undertakes to perform services which may require the use, by that supplier, of special knowledge, skill and expertise but not the transfer of such special knowledge, skill or expertise to the other party.

• In most cases involving the supply of know-how, there would generally be very little more which needs to be done by the supplier under the contract other than to supply existing information or reproduce existing material. On the other hand, a contract for the performance of services would, in the majority of cases, involve a very much greater level of expenditure by the supplier in order to perform his contractual obligations. For instance, the supplier, depending on the nature of the services to be rendered, may have to incur salaries and wages for employees engaged in researching, designing, testing, drawing and other associated activities or payments to sub-contractors for the performance of similar services.

(Added on 28 January 2003 see History)

11.4 Examples of payments which should therefore not be considered to be received as consideration for the provision of know-how but, rather, for the provision of services, include:

• payments obtained as consideration for after-sales service,

• payments for services rendered by a seller to the purchaser under a warranty,

• payments for pure technical assistance,

• payments for a list of potential customers, when such a list is developed specifically for the payer out of generally available information (a payment for the confidential list of customers to which the payee has provided a particular product or service would, however, constitute a payment for know-how as it would relate to the commercial experience of the payee in dealing with these customers),

• payments for an opinion given by an engineer, an advocate or an accountant, and

• payments for advice provided electronically, for electronic communications with technicians or for accessing, through computer networks, a trouble-shooting database such as a database that provides users of software with non-confidential information in response to frequently asked questions or common problems that arise frequently.

(Amended on 17 July 2008 see History)

11.5 In the particular case of a contract involving the provision, by the supplier, of information concerning computer programming, as a general rule the payment will only be considered to be made in consideration for the provision of such information so as to constitute know-how where it is made to acquire information constituting ideas and principles underlying the program, such as logic, algorithms or programming languages or techniques, where this information is provided under the condition that the customer not disclose it without authorisation and where it is subject to any available trade secret protection.(Added on 28 January 2003 see History)

11.6 In business practice, contracts are encountered which cover both know-how and the provision of technical assistance. One example, amongst others, of contracts of this kind is that of franchising, where the franchisor imparts his knowledge and experience to the franchisee and, in addition, provides him with varied technical assistance, which, in certain cases, is backed up with financial assistance and the supply of goods. The appropriate course to take with a mixed contract is, in principle, to break down, on the basis of the information contained in the contract or by means of a reasonable apportionment, the whole amount of the stipulated consideration according to the various parts of what is being provided under the contract, and then to apply to each part of it so determined the taxation treatment proper thereto. If, however, one part of what is being provided constitutes by far the principal purpose of the contract and the other parts stipulated therein are only of an ancillary and largely unimportant character, then the treatment applicable to the principal part should generally be applied to the whole amount of the consideration.(Renumbered on 28 January 2003 see History)

12. Whether payments received as consideration for computer software may be classified as royalties poses difficult problems but is a matter of considerable importance in view of the rapid development of computer technology in recent years and the extent of transfers of such technology across national borders. In 1992, the Commentary was amended to describe the principles by which such classification should be made. Paragraphs 12 to 17 were further amended in 2000 to refine the analysis by which business profits are distinguished from royalties in computer software transactions. In most cases, the revised analysis will not result in a different outcome.(Amended on 29 April 2000 see History)

12.1 Software may be described as a program, or series of programs, containing instructions for a computer required either for the operational processes of the computer itself (operational software) or for the accomplishment of other tasks (application software). It can be transferred through a variety of media, for example in writing or electronically, on a magnetic tape or disk, or on a laser disk or CD-ROM. It may be standardised with a wide range of applications or be tailor-made for single users. It can be transferred as an integral part of computer hardware or in an independent form available for use on a variety of hardware.(Added on 29 April 2000 see History)

12.2 The character of payments received in transactions involving the transfer of computer software depends on the nature of the rights that the transferee acquires under the particular arrangement regarding the use and exploitation of the program. The rights in computer programs are a form of intellectual property. Research into the practices of OECD member countries has established that all but one protect rights in computer programs either explicitly or implicitly under copyright law. Although the term “computer software” is commonly used to describe both the program — in which the intellectual property rights (copyright) subsist — and the medium on which it is embodied, the copyright law of most OECD member countries recognises a distinction between the copyright in the program and software which incorporates a copy of the copyrighted program. Transfers of rights in relation to software occur in many different ways ranging from the alienation of the entire rights in the copyright in a program to the sale of a product which is subject to restrictions on the use to which it is put. The consideration paid can also take numerous forms. These factors may make it difficult to determine where the boundary lies between software payments that are properly to be regarded as royalties and other types of payment. The difficulty of determination is compounded by the ease of reproduction of computer software, and by the fact that acquisition of software frequently entails the making of a copy by the acquirer in order to make possible the operation of the software.(Added on 29 April 2000 see History)

13. The transferee’s rights will in most cases consist of partial rights or complete rights in the underlying copyright (see paragraphs 13.1 and 15 below), or they may be (or be equivalent to) partial or complete rights in a copy of the program (the “program copy”), whether or not such copy is embodied in a material medium or provided electronically (see paragraphs 14 to 14.2 below). In unusual cases, the transaction may represent a transfer of “know-how” or secret formula (paragraph 14.3).(Replaced on 29 April 2000 see History)

13.1 Payments made for the acquisition of partial rights in the copyright (without the transferor fully alienating the copyright rights) will represent a royalty where the consideration is for granting of rights to use the program in a manner that would, without such license, constitute an infringement of copyright. Examples of such arrangements include licenses to reproduce and distribute to the public software incorporating the copyrighted program, or to modify and publicly display the program. In these circumstances, the payments are for the right to use the copyright in the program (i.e.to exploit the rights that would otherwise be the sole prerogative of the copyright holder). It should be noted that where a software payment is properly to be regarded as a royalty there may be difficulties in applying the copyright provisions of the Article to software payments since paragraph 2 requires that software be classified as a literary, artistic or scientific work. None of these categories seems entirely apt. The copyright laws of many countries deal with this problem by specifically classifying software as a literary or scientific work. For other countries treatment as a scientific work might be the most realistic approach. Countries for which it is not possible to attach software to any of those categories might be justified in adopting in their bilateral treaties an amended version of paragraph 2 which either omits all references to the nature of the copyrights or refers specifically to software.(Added on 29 April 2000 see History)

14. In other types of transactions, the rights acquired in relation to the copyright are limited to those necessary to enable the user to operate the program, for example, where the transferee is granted limited rights to reproduce the program. This would be the common situation in transactions for the acquisition of a program copy. The rights transferred in these cases are specific to the nature of computer programs. They allow the user to copy the program, for example onto the user’s computer hard drive or for archival purposes. In this context, it is important to note that the protection afforded in relation to computer programs under copyright law may differ from country to country. In some countries the act of copying the program onto the hard drive or random access memory of a computer would, without a license, constitute a breach of copyright. However, the copyright laws of many countries automatically grant this right to the owner of software which incorporates a computer program. Regardless of whether this right is granted under law or under a license agreement with the copyright holder, copying the program onto the computer’s hard drive or random access memory or making an archival copy is an essential step in utilising the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analysing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as commercial income in accordance with Article 7.(Replaced on 29 April 2000 see History)

14.1 The method of transferring the computer program to the transferee is not relevant. For example, it does not matter whether the transferee acquires a computer disk containing a copy of the program or directly receives a copy on the hard disk of her computer via a modem connection. It is also of no relevance that there may be restrictions on the use to which the transferee can put the software.(Added on 29 April 2000 see History)

14.2 The ease of reproducing computer programs has resulted in distribution arrangements in which the transferee obtains rights to make multiple copies of the program for operation only within its own business. Such arrangements are commonly referred to as “site licences”, “enterprise licenses”, or “network licences”. Although these arrangements permit the making of multiple copies of the program, such rights are generally limited to those necessary for the purpose of enabling the operation of the program on the licensee’s computers or network, and reproduction for any other purpose is not permitted under the license. Payments under such arrangements will in most cases be dealt with as business profits in accordance with Article 7.(Added on 29 April 2000 see History)

14.3 Another type of transaction involving the transfer of computer software is the more unusual case where a software house or computer programmer agrees to supply information about the ideas and principles underlying the program, such as logic, algorithms or programming languages or techniques. In these cases, the payments may be characterised as royalties to the extent that they represent consideration for the use of, or the right to use, secret formulas or for information concerning industrial, commercial or scientific experience which cannot be separately copyrighted. This contrasts with the ordinary case in which a program copy is acquired for operation by the end user.(Added on 29 April 2000 see History)

14.4 Arrangements between a software copyright holder and a distribution intermediary frequently will grant to the distribution intermediary the right to distribute copies of the program without the right to reproduce that program. In these transactions, the rights acquired in relation to the copyright are limited to those necessary for the commercial intermediary to distribute copies of the software program. In such transactions, distributors are paying only for the acquisition of the software copies and not to exploit any right in the software copyrights. Thus, in a transaction where a distributor makes payments to acquire and distribute software copies (without the right to reproduce the software), the rights in relation to these acts of distribution should be disregarded in analysing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business profits in accordance with Article 7. This would be the case regardless of whether the copies being distributed are delivered on tangible media or are distributed electronically (without the distributor having the right to reproduce the software), or whether the software is subject to minor customisation for the purposes of its installation.(Added on 17 July 2008 see History)

15. Where consideration is paid for the transfer of the full ownership of the rights in the copyright, the payment cannot represent a royalty and the provisions of the Article are not applicable. Difficulties can arise where there is a transfer of rights involving:

• exclusive right of use of the copyright during a specific period or in a limited geographical area;

• additional consideration related to usage;

• consideration in the form of a substantial lump sum payment.

(Amended on 17 July 2008 see History)

16. Each case will depend on its particular facts but in general if the payment is in consideration for the transfer of rights that constitute a distinct and specific property (which is more likely in the case of geographically-limited than time limited rights), such payments are likely to be business profits within Article 7 or a capital gain within Article 13 rather than royalties within Article 12. 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.(Amended on 17 July 2008 see History)

17. Software payments may be made under mixed contracts. Examples of such contracts include sales of computer hardware with built-in software and concessions of the right to use software combined with the provision of services. The methods set out in paragraph 11 above for dealing with similar problems in relation to patent royalties and know-how are equally applicable to computer software. Where necessary the total amount of the consideration payable under a contract should be broken down on the basis of the information contained in the contract or by means of a reasonable apportionment with the appropriate tax treatment being applied to each apportioned part.(Amended on 29 April 2000 see History)

17.1 The principles expressed above as regards software payments are also applicable as regards transactions concerning other types of digital products such as images, sounds or text. The development of electronic commerce has multiplied the number of such transactions. In deciding whether or not payments arising in these transactions constitute royalties, the main question to be addressed is the identification of that for which the payment is essentially made.(Added on 28 January 2003 see History)

17.2 Under the relevant legislation of some countries, transactions which permit the customer to electronically download digital products may give rise to use of copyright by the customer,e.g.because a right to make one or more copies of the digital content is granted under the contract. Where the consideration is essentially for something other than for the use of, or right to use, rights in the copyright (such as to acquire other types of contractual rights, data or services), and the use of copyright is limited to such rights as are required to enable downloading, storage and operation on the customer’s computer, network or other storage, performance or display device, such use of copyright should not affect the analysis of the character of the payment for purposes of applying the definition of “royalties”.(Added on 28 January 2003 see History)

17.3 This is the case for transactions that permit the customer (which may be an enterprise) to electronically download digital products (such as software, images, sounds or text) for that customer’s own use or enjoyment. In these transactions, the payment is essentially for the acquisition of data transmitted in the form of a digital signal and therefore does not constitute royalties but falls within Article 7 or Article 13, as the case may be. To the extent that the act of copying the digital signal onto the customer’s hard disk or other non-temporary media involves the use of a copyright by the customer under the relevant law and contractual arrangements, such copying is merely the means by which the digital signal is captured and stored. This use of copyright is not important for classification purposes because it does not correspond to what the payment is essentially in consideration for (i.e.to acquire data transmitted in the form of a digital signal), which is the determining factor for the purposes of the definition of royalties. There also would be no basis to classify such transactions as “royalties” if, under the relevant law and contractual arrangements, the creation of a copy is regarded as a use of copyright by the provider rather than by the customer.(Added on 28 January 2003 see History)

17.4 By contrast, transactions where the essential consideration for the payment is the granting of the right to use a copyright in a digital product that is electronically downloaded for that purpose will give rise to royalties. This would be the case, for example, of a book publisher who would pay to acquire the right to reproduce a copyrighted picture that it would electronically download for the purposes of including it on the cover of a book that it is producing. In this transaction, the essential consideration for the payment is the acquisition of rights to use the copyright in the digital product,i.e.the right to reproduce and distribute the picture, and not merely for the acquisition of the digital content.(Added on 28 January 2003 see History)

18. The suggestions made above regarding mixed contracts could also be applied in regard to certain performances by artists and, in particular, in regard to an orchestral concert given by a conductor or a recital given by a musician. The fee for the musical performance, together with that paid for any simultaneous radio broadcasting thereof, seems to fall under Article 17. Where, whether under the same contract or under a separate one, the musical performance is recorded and the artist has stipulated that he, on the basis of his copyright in the sound recording, be paid royalties on the sale or public playing of the records, then so much of the payment received by him as consists of such royalties falls to be treated under Article 12. Where, however, the copyright in a sound recording, because of either the relevant copyright law or the terms of contract, belongs to a person with whom the artist has contractually agreed to provide his services (i.e.a musical performance during the recording), or to a third party, the payments made under such a contract fall under Articles 7 (e.g.if the performance takes place outside the State of source of the payment) or 17 rather than under this Article, even if these payments are contingent on the sale of the recordings.(Amended on 28 January 2003 see History)

19. It is further pointed out that variable or fixed payments for the working of mineral deposits, sources or other natural resources are governed by Article 6and do not, therefore, fall within the present Article.(Renumbered and amended on 23 July 1992 see History)

Paragraph 320. Certain States consider that dividends, interest and royalties arising from sources in their territory and payable to individuals or legal persons who are residents of other States fall outside the scope of the arrangement made to prevent them from being taxed both in the State of source and in the State of the beneficiary’s residence when the beneficiary has a permanent establishment in the former State. Paragraph 3 is not based on such a conception which is sometimes referred to as “the force of attraction of the permanent establishment”. It does not stipulate that royalties arising to a resident of a Contracting State from a source situated in the other State must, by a kind of legal presumption, or fiction even, be related to a permanent establishment which that resident may have in the latter State, so that the said State would not be obliged to limit its taxation in such a case. The paragraph merely provides that in the State of source the royalties are taxable as part of the profits of the permanent establishment there owned by the beneficiary which is a resident of the other State, if they are paid in respect of rights or property forming part of the assets of the permanent establishment or otherwise effectively connected with that establishment. In that case, paragraph 3 relieves the State of source of the royalties from any limitations under the Article. The foregoing explanations accord with those in the Commentary on Article 7.(Renumbered on 23 July 1992 see History)

21. It has been suggested that the paragraph could give rise to abuses through the transfer of rights or property to permanent establishments set up solely for that purpose in countries that offer preferential treatment to royalty income. Apart from the fact that such abusive transactions might trigger the application of domestic anti-abuse rules, it must be recognised that a particular location can only constitute a permanent establishment if a business is carried on therein and, as explained below, that the requirement that a right or property be “effectively connected” to such a location requires more than merely recording the right or property in the books of the permanent establishment for accounting purposes.(Amended on 22 July 2010 see History)

21.1 A right or property in respect of which royalties are paid will be effectively connected with a permanent establishment, and will therefore form part of its business assets, if the “economic” ownership of that right or property is allocated to that permanent establishment under the principles developed in the Committee’s report entitled *Attribution of Profits to Permanent Establishments[^61] * (see in particular paragraphs 72 to 97 of Part I of the report) for the purposes of the application of paragraph 2 of Article 7. In the context of that paragraph, the “economic” ownership of a right or property means the equivalent of ownership for income tax purposes by a separate enterprise, with the attendant benefits and burdens (e.g.the right to the royalties attributable to the ownership of the right or property, the right to any available depreciation and the potential exposure to gains or losses from the appreciation or depreciation of that right or property).(Added on 22 July 2010 see History)

21.2 In the case of the permanent establishment of an enterprise carrying on insurance activities, the determination of whether a right or property is effectively connected with the permanent establishment shall be made by giving due regard to the guidance set forth in Part IV of the Committee’s report with respect to whether the income on or gain from that right or property is taken into account in determining the permanent establishment’s yield on the amount of investment assets attributed to it (see in particular paragraphs 165 to 170 of Part IV). That guidance being general in nature, tax authorities should consider applying a flexible and pragmatic approach which would take into account an enterprise’s reasonable and consistent application of that guidance for purposes of identifying the specific assets that are effectively connected with the permanent establishment.(Added on 22 July 2010 see History)

Paragraph 422. The purpose of this paragraph is to restrict the operation of the provisions concerning the taxation of royalties in cases 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 paid exceeds the amount which would have been agreed upon by the payer and the beneficial owner had they stipulated at arm’s length. It provides that in such a case the provisions of the Article apply only to that last-mentioned amount and that the excess part of the royalty shall remain taxable according to the laws of the two Contracting States due regard being had to the other provisions of the Convention. The paragraph permits only the adjustment of the amount of royalties and not the reclassification of the royalties in such a way as to give it a different character,e.g.a contribution to equity capital. For such an adjustment to be possible under paragraph 4 of Article 12 it would be necessary as a minimum to remove the limiting phrase “having regard to the use, right or information for which they are paid”. If greater clarity of intent is felt appropriate, a phrase such as “for whatever reason” might be added after “exceeds”.(Amended on 28 January 2003 see History)

23. It is clear from the text that for this clause to apply the payment held excessive must be due to a special relationship between the payer and the beneficial owner or between both of them and some other person. There may be cited as examples cases where royalties are paid to an individual or legal person who directly or indirectly controls the payer, or who is directly or indirectly controlled by him or is subordinate to a group having common interest with him. These examples, moreover, are similar or analogous to the cases contemplated by Article 9.(Renumbered on 23 July 1992 see History)

24. On the other hand, the concept of special relationship also covers relationship by blood or marriage and, in general, any community of interests as distinct from the legal relationship giving rise to the payment of the royalty.(Renumbered on 23 July 1992 see History)

25. With regard to the taxation treatment to be applied to the excess part of the royalty, the exact nature of such excess will need to be ascertained according to the circumstances of each case, in order to determine the category of income in which it should be classified for the purpose of applying the provisions of the tax laws of the States concerned and the provisions of the Convention. If two Contracting States should have difficulty in determining the other provisions of the Convention applicable, as cases required, to the excess part of the royalties, there would be nothing to prevent them from introducing additional clarifications in the last sentence of paragraph 4, as long as they do not alter its general purport.(Renumbered on 23 July 1992 see History)

26. Should the principles and rules of their respective laws oblige the two Contracting States to apply different Articles of the Convention for the purpose of taxing the excess, it will be necessary to resort to the mutual agreement procedure provided by the Convention in order to resolve the difficulty.(Renumbered on 23 July 1992 see History)

Observations on the Commentary27. ItalyandSpaindo not adhere to the interpretation in paragraph 8.2. They hold the view that payments in consideration for the transfer of the ownership of an element referred to in the definition of royalties fall within the scope of this Article where less than the full ownership is transferred. Italy also takes that view with respect to paragraphs 15and 16.(Added on 17 July 2008 see History)

27.1 As regards paragraph 10.1,Italyconsiders that where contracts grant exclusive distribution rights of a product or a service together with other rights referred to in the definition of royalties, the part of the payment made, under these contracts, in consideration for the exclusive distribution rights of a product or a service may, depending on the circumstances, be covered by the Article.(Added on 17 July 2008 see History)

28. Mexico,PortugalandSpaindo not adhere to the interpretation in paragraphs 14, 14.4, 15, 16 and 17.1 to 17.4. Mexico, Portugal and Spain hold the view that payments relating to software fall within the scope of the Article where less than the full rights to software are transferred either if the payments are in consideration for the right to use a copyright on software for commercial exploitation (except payments for the right to distribute standardised software copies, not comprising the right neither to customise nor to reproduce them) or if they relate to software acquired for the business use of the purchaser, when, in this last case, the software is not absolutely standardised but somehow adapted to the purchaser.(Amended on 17 July 2008 see History)

29. Mexicodoes not adhere to the interpretation in paragraph 8.2. Mexico holds the view that payments in consideration for the transfer of rights presented as an alienation (e.g.geographically limited or time limited rights) fall within the scope of this Article because less than the full rights inherent to an element of property referred to in the definition are transferred.(Added on 17 July 2008 see History)

30. TheSlovak Republicdoes not adhere to the interpretation in paragraphs 14, 15 and 17. The Slovak Republic holds the view that payments relating to software fall within the scope of the Article where less than the full rights to software are transferred, either if the payments are in consideration for the right to use a copyright on software for commercial exploitation or if they relate to software acquired for the personal or business use of the purchaser when, in this last case, the software is not absolutely standardised but somehow adapted to the purchaser.(Added on 28 January 2003 see History)

31. Greecedoes not adhere to the interpretation in paragraphs 14 and 15 above. Greece takes the view that payments related to software fall within the scope of this Article, whether the payments are in consideration for the use of (or the right to use) software for commercial exploitation or for the personal or business use of the purchaser.(Replaced on 21 September 1995 see History)

31.1 With respect to paragraph 14,Koreais of the opinion that the paragraph may neglect the fact that know-how can be transferred in the form of computer software. Therefore, Korea considers know-how imparted by non-residents through software or computer program to be treated in accordance with Article 12.(Added on 23 October 1997 see History)

31.2 Italydoes not agree that the interpretation in paragraph 14.4 will apply in all cases. It will examine each case taking into account all circumstances, including the rights granted in relation to the acts of distribution.(Added on 17 July 2008 see History)

31.3 Concerning paragraph 9.1,Germanyreserves its position on whether and under which circumstances payments made for the acquisition of the right of disposal over the transport capacity of pipelines or the capacity of technical installations, lines or cables for the transmission of electrical power or communications (including the distribution of radio and television programs) could be regarded as payments made for the leasing of industrial, commercial or scientific equipment.(Renumbered on 15 July 2014 see History)

31.4 Greecedoes not adhere to the interpretation in the sixth dash of paragraph 11.4 and takes the view that all concerning payments are falling within the scope of the Article.(Renumbered on 15 July 2015 see History)

31.5 Greecedoes not adhere to the interpretation in paragraphs 17.2 and 17.3 because the payments related to downloading of computer software ought to be considered as royalties even if those products are acquired for the personal or business use of the purchaser.(Renumbered on 15 July 2014 see History)

Reservations on the ArticleParagraph 132. (Renumbered on 15 July 2014 see History)

32.1 (Renumbered on 15 July 2014 see History)

33. Greeceis unable to accept a provision which would preclude it, in bilateral conventions for the avoidance of double taxation, from stipulating a clause conferring on it the right to tax royalties at a rate of up to 10 per cent.(Amended on 23 October 1997 see History)

34. TheCzech Republicreserves the right to tax at a rate of 10 per cent royalties that, under Czech law, have a source in the Czech Republic. The Czech Republic also reserves the right to subject payments for the use of, or the right to use, software rights to a tax regime different from that provided for copyrights.(Added on 23 October 1997 see History)

35. Canadareserves its position on paragraph 1 and wishes to retain a 10 per cent rate of tax at source in its bilateral conventions. However, Canada would be prepared to provide an exemption from tax for copyright royalties in respect of cultural, dramatic, musical or artistic work, but not including royalties in respect of motion picture films and works on films or video tape or other means of reproduction for use in connection with television. Canada would also be prepared in most circumstances to provide an exemption for royalties in respect of computer software, patents and know-how.(Amended on 29 April 2000 see History)

36. Australia,Chile,Korea,Mexico,New Zealand,Poland,Portugal, theSlovak Republic,SloveniaandTurkeyreserve the right to tax royalties at source.(Amended on 22 July 2010 see History)

37. Italyreserves the right to tax royalties at source, but is prepared to grant favourable treatment to certain royalties (e.g.copyright royalties). Italy also reserves the right to subject the use of, or the right to use, software rights to a tax regime different from that provided for copyright.(Renumbered on 21 September 1995 see History)

Paragraph 238. Greecereserves the right to include the payments referred to in paragraphs 9.1, 9.2 and 9.3 in the definition of royalties.(Renumbered on 15 July 2014 see History)

39. Australiareserves the right to amend the definition of royalties to include payments or credits which are treated as royalties under its domestic law.(Replaced on 15 July 2005 see History)

40. Canada,Chile, theCzech Republic,Koreaand theSlovak Republicreserve the right to add the words “for the use of, or the right to use, industrial, commercial or scientific equipment” to paragraph 2.(Amended on 15 July 2014 see History)

41. Greece,ItalyandMexicoreserve the right to continue to include income derived from the leasing of industrial, commercial or scientific equipment and of containers in the definition of “royalties” as provided for in paragraph 2 of Article 12 of the 1977 Model Convention.(Amended on 17 July 2008 see History)

41.1 Polandreserves the right to include in the definition of “royalties” income derived from the use of, or the right to use, industrial, commercial or scientific equipment and containers.(Added on 17 July 2008 see History)

42. New Zealandreserves the right to tax at source payments from the leasing of industrial, commercial or scientific equipment and of containers.(Renumbered on 21 September 1995 see History)

43. (Deleted on 17 July 2008 see History)

43.1 Portugalreserves the right to tax at source as royalties income from the leasing of industrial, commercial or scientific equipment and of containers, as well as income arising from technical assistance in connection with the use of, or the right to use, such equipment and containers.(Added on 28 January 2003 see History)

44. Portugalreserves the right to tax at source as royalties income arising from technical assistance in connection with the use of, or right to use, rights or information of the type referred to in paragraph 2 of the Article.(Amended on 22 July 2010 see History)

45. (Deleted on 15 July 2014 see History)

46. Turkeyreserves the right to tax at source income from the leasing of industrial, commercial or scientific equipment.(Renumbered on 21 September 1995 see History)

46.1 Mexicoand theUnited Statesreserve the right to treat as a royalty a gain derived from the alienation of a property described in paragraph 2 of the Article, provided that the gain is contingent on the productivity, use or disposition of the property.(Amended on 28 January 2003 see History)

46.2 (Renumbered on 15 July 2014 see History)

46.3 (Renumbered on 15 July 2014 see History)

47. (Deleted on 22 July 2010 see History)

Other reservations48. Australia,Belgium,Canada,Chile, theCzech Republic,Estonia,France,Israel,Mexico, theSlovak RepublicandSloveniareserve the right, in order to fill what they consider as a gap in the Article, to propose a provision defining the source of royalties by analogy with the provisions of paragraph 5 of Article 11, which deals with the same problem in the case of interest.(Amended on 15 July 2014 see History)

49. Mexicoreserves the right to propose a provision considering that royalties will be deemed to arise in a Contracting State where such royalties relate to the use of, or the right to use, in that Contracting State, any property or right described in paragraph 2 of Article 12.(Added on 15 July 2005 see History)

50. TheSlovak Republicreserves the right to subject payments for the use of, or the right to use, software rights to a tax regime different from that provided for copyrights.(Added on 17 July 2008 see History)

Title: Amended, by adding the word “THE” to the title of the Commentary on Article 12, when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, the title read as follows:1 “COMMENTARY ON ARTICLE 12 CONCERNING TAXATION OF ROYALTIES”

Paragraph 1Amended on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of the Annex of another report entitled “Issues Related to Article 14 of the OECD Model Tax Convention” (adopted by the OECD Committee on Fiscal Affairs on 27 January 2000). In the 1963 Draft Model Convention (adopted by the OECD Council on 30 July 1963) and until 29 April 2000, paragraph 1 read as follows:“1. In principle, royalties in respect of licences to use patents and similar property and similar payments are income to the recipient from a letting. The letting may be granted in connection with an industrial or commercial enterprise (e.g.the use of literary copyright granted by a publisher) or an independent profession (e.g.use of a patent granted by the inventor) or quite independently of any activity of the grantor (e.g.use of a patent granted by the inventor’s heirs).”

The heading immediately preceding paragraph 1 was deleted when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, the heading immediately preceding paragraph 1 read as follows:1 “A. General Observations”

Paragraph 2Amended on 23 July 1992, by replacing the reference to paragraph 5 of Article 24 paragraph with a reference to paragraph 4 of Article 24 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992. In the 1977 Model Convention and until 23 July 1992, paragraph 2 read as follows:“2. Certain countries do not allow royalties paid to be deducted for the purposes of the payer’s tax unless the recipient also resides in the same State or is taxable in that State. Otherwise they forbid the deduction. The question whether the deduction should also be allowed in cases where the royalties are paid by a resident of a Contracting State to a resident of the other State, is dealt with in paragraph 5 of Article 24.”

Paragraph 2 of the 1977 Model Convention corresponded to paragraph 9 of the 1963 Draft Convention. Paragraph 1 of the 1963 Draft Convention was deleted and paragraph 9 was amended and renumbered when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. The same time the heading preceding paragraph 9 was deleted. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 9 and the heading preceding it read as follows:

“B. Deductibility of Royalties for the Purposes of the Payer’s Tax

9. Certain countries do not allow royalties paid to be deducted for the purposes of the payer’s tax unless the recipient also resides in the same State or is taxable in that State. Otherwise they forbid the deduction. The Fiscal Committee considers it desirable that the deduction in question should also be allowed in cases where the royalties are paid by a resident of a Contracting State to a resident of the other State, the case of fraud being, of course, reserved; it considers that the deduction should not be forbidden simply because the tax payable by the recipient of such royalties is not levied in the State of source in application of the proposed Article. Any other method of procedure might cancel out the beneficial effects of the measures taken to avoid double taxation.”

Paragraph 2 of the 1963 Draft Convention was deleted when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 2 read as follows:“2. The Model Conventions drawn up by the Fiscal Committee of the League of Nations in 1928 did not contain any specific rules about the taxation of such royalties and similar payments. These could thus only be taxed in the State in which the grantor resided, unless they were obtained in connection with a permanent establishment maintained by the grantor in the other State, the concept of “permanent establishment” including here a fixed place of business used for the performance of professional services.”

Paragraph 3Corresponds to paragraph 10 of the 1963 Draft Convention. Paragraph 3 of the 1963 Draft Convention was deleted and paragraph 10 and the preceding headings were amended and renumbered as paragraph 3 when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 10 and the preceding headings read as follows:1 “II. COMMENTARY ON THE DRAFT ARTICLE

1 Paragraph 1

10. The first paragraph follows the Model Conventions drafted in London in 1946 by the Fiscal Committee of the League of Nations and the solutions adopted in many Conventions between O.E.C.D. Member countries, in adopting the principle of exclusive taxation of royalties in the State of the recipient’s residence. The only exception to this principle is that made in the cases dealt with by paragraph 3.”

Paragraph 3 of the 1963 Draft Convention was deleted when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 3 read as follows:“3. The Model Convention drafted in Mexico in 1943 by the Fiscal Committee of the League of Nations does contain a special provision on the taxation of royalties and similar payments (Article X). In this Model Convention, a distinction was made between royalties and amounts received as a consideration for the right to use:a patent, a secret process or formula, a trade mark or other analogous right; and

a musical, artistic, literary, scientific or other cultural work.”

Paragraph 4Amended on 15 July 2014 by the Report entitled “The 2014 Update to the Model Tax Convention”, adopted by the Council of the OECD on 15 July 2014. After 28 January 2003 and until 15 July 2014, paragraph 4 read as follows:“4. The requirement of beneficial ownership was introduced in paragraph 1 of Article 12 to clarify how the Article applies in relation to payments made to intermediaries. It makes plain that the State of source is not obliged to give up taxing rights over royalty income merely because that income was immediately received by a resident of a State with which the State of source had concluded a convention. The term “beneficial owner” is not used in a narrow technical sense, rather, it should be understood in its context and in light of the object and purposes of the Convention, including avoiding double taxation and the prevention of fiscal evasion and avoidance.”

Paragraph 4 was replaced on 28 January 2003 when it was amended and renumbered as paragraph 4.2 (see history of paragraph 4.2) and a new paragraph 4 was added by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003, on the basis of another report entitled “Restricting the Entitlement to Treaty Benefits” (adopted by the OECD Committee on Fiscal Affairs on 7 November 2002).

Paragraph 4.1Amended on 15 July 2014, by moving the last two sentences to a new paragraph 10.1 and changing the words “received by” to “paid to” and “immediate” to “direct”, by the Report entitled “The 2014 Update to the Model Tax Convention”, adopted by the Council of the OECD on 15 July 2014. After 28 January 2003 and until 15 July 2014, paragraph 4.1 and its footnote read as follows:“4.1. Relief or exemption in respect of an item of income is granted by the State of source to a resident of the other Contracting State to avoid in whole or in part the double taxation that would otherwise arise from the concurrent taxation of that income by the State of residence. Where an item of income is received by a resident of a Contracting State acting in the capacity of agent or nominee it would be inconsistent with the object and purpose of the Convention for the State of source to grant relief or exemption merely on account of the status of the immediate recipient of the income as a resident of the other Contracting State. The immediate recipient of the income in this situation qualifies as a resident but no potential double taxation arises as a consequence of that status since the recipient is not treated as the owner of the income for tax purposes in the State of residence. It would be equally inconsistent with the object and purpose of the Convention for the State of source to grant relief or exemption where a resident of a Contracting State, otherwise than through an agency or nominee relationship, simply acts as a conduit for another person who in fact receives the benefit of the income concerned. For these reasons, the report from the Committee on Fiscal Affairs entitled “Double Taxation Conventions and the Use of Conduit Companies”1concludes that a conduit company cannot normally be regarded as the beneficial owner if, though the formal owner, it has, as a practical matter, very narrow powers which render it, in relation to the income concerned, a mere fiduciary or administrator acting on account of the interested parties.

[^62]

Paragraph 4.1 was added on 28 January 2003 by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003, on the basis of another report entitled “Restricting the Entitlement to Treaty Benefits” (adopted by the OECD Committee on Fiscal Affairs on 7 November 2002).

Paragraph 4.2Added on 15 July 2014 by the report entitled “The 2014 Update to the Model Tax Convention” adopted by the Council on 15 July 2014. Paragraph 4.2 includes to the last two sentences of paragraph 4.1 as they read before 15 July 2014 (see history of paragraph 4.1).

Paragraph 4.3Added on 15 July 2014 by the report entitled “The 2014 Update to the Model Tax Convention” adopted by the Council on 15 July 2014.

Paragraph 4.4Added on 15 July 2014 by the report entitled “The 2014 Update to the Model Tax Convention” adopted by the Council on 15 July 2014.

Paragraph 4.5Added on 15 July 2014 by the report entitled “The 2014 Update to the Model Tax Convention” adopted by the Council on 15 July 2014.

Paragraph 4.6Corresponds to paragraph 4.2 as it read before 15 July 2014. On that date paragraph 4.2 was amended and renumbered as paragraph 4.6 by the report entitled “The 2014 Update to the Model Tax Convention”, adopted by the OECD Council on 15 July 2014. After 28 January 2003 and until 15 July 2014, paragraph 4.2 read as follows:“4.2. Subject to other conditions imposed by the Article, the limitation of tax in the State of source remains available when an intermediary, such as an agent or nominee, is interposed between the beneficiary and the payer, in those cases where the beneficial owner is a resident of the other Contracting State (the text of the Model was amended in 1995 to clarify this point, which has been the consistent position of all member countries). States which wish to make this more explicit are free to do so during bilateral negotiations.”

Paragraph 4.2 as it read before 28 January 2003 corresponded to paragraph 4. On 28 January 2003 paragraph 4 was amended and renumbered paragraph 4.2 by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003, on the basis of another report entitled “Restricting the Entitlement to Treaty Benefits” (adopted by the OECD Committee on Fiscal Affairs on 7 November 2002). After 23 October 1997 and until 28 January 2003, paragraph 4 read as follows:“4. Under paragraph 1, the exemption from tax in the State of source is not available when an intermediary, such as an agent or nominee, is interposed between the beneficiary and the payer, unless the beneficial owner is a resident of the other Contracting State (the text of the Model was amended in 1995 to clarify this point, which has been the consistent position of all member countries). States which wish to make this more explicit are free to do so during bilateral negotiations.”

Paragraph 4 was amended on 23 October 1997 by the report entitled “The 1997 Update to the Model Tax Convention”, adopted by the OECD Council on 23 October 1997. In the 1977 Model Tax Convention and until 23 October 1997, paragraph 4 read as follows:“4. Under paragraph 1, the exemption from tax in the State of source is not available when an intermediary, such as an agent or nominee, is interposed between the beneficiary and the payer, unless the beneficial owner is a resident of the other Contracting State. States which wish to make this more explicit are free to do so during bilateral negotiations. The term “paid” has a very wide meaning, since the concept of payment means the fulfilment of the obligation to put funds at the disposal of the creditor in the manner required by contract or by custom.”

Paragraph 4 of the 1963 Draft Convention was replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 4 of the 1963 Draft Convention was deleted and a new paragraph 4 was added. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 4 read as follows:“4. In case a), the royalties and other payments were only taxable in the State where the right or property was used. In case b), the right to tax rested solely with the State of which the grantor — in this case the grantor of the work — was a resident, unless the royalties were obtained in connection with a permanent establishment maintained by the grantor in the other State, the concept of “permanent establishment” here again including a fixed place of business used for the performance of professional services.”

Paragraph 5Amended on 17 July 2008, by replacing the cross-reference to “paragraph 53 of the Commentary on Article 24” with “paragraph 71 of the Commentary on Article 24”, by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008. After 23 October 1997 and until 17 July 2008, paragraph 5 read as follows:“5. The Article deals only with royalties arising in a Contracting State and beneficially owned by a resident of the other Contracting State. It does not, therefore, apply to royalties arising in a third State as well as to royalties arising in a Contracting State which are attributable to a permanent establishment which an enterprise of that State has in the other Contracting State (for these cases cf. paragraphs 4 to 6 of the Commentary on Article 21). Procedural questions are not dealt with in this Article. Each State should be able to apply the procedure provided in its own law. Specific questions arise with triangular cases (cf. paragraph 53 of the Commentary on Article 24).”

Paragraph 5 was previously amended on 23 October 1997 by the report entitled “The 1997 Update to the Model Tax Convention”, adopted by the OECD Council on 23 October 1997. After 23 July 1992 and until 23 October 1997, paragraph 5 read as follows:“5. The Article deals only with royalties arising in a Contracting State and paid to a resident of the other Contracting State. It does not, therefore, apply to royalties arising in a third State as well as to royalties arising in a Contracting State which are attributable to a permanent establishment which an enterprise of that State has in the other Contracting State (for these cases cf. paragraphs 4 to 6 of the Commentary on Article 21). Procedural questions are not dealt with in this Article. Each State should be able to apply the procedure provided in its own law. Specific questions arise with triangular cases (cf. paragraph 53 of the Commentary on Article 24).”

Paragraph 5 was previously amended on 23 July 1992 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992, on the basis of paragraph 60 of another report entitled “Triangular Cases” (adopted by the OECD Council on 23 July 1992). In the 1977 Model Convention and until 23 July 1992, paragraph 5 read as follows:“5. The Article deals only with royalties arising in a Contracting State and paid to a resident of the other Contracting State. It does not, therefore, apply to royalties arising in a third State as well as to royalties arising in a Contracting State which are attributable to a permanent establishment which an enterprise of that State has in the other Contracting State (for these cases cf. paragraphs 4 to 6 of the Commentary on Article 21).”

Paragraph 5 of the 1963 Draft Convention was replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 5 was deleted and a new paragraph 5 was added. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 5 read as follows:

“5. On this question of the taxation of patent royalties and similar payments, the Model Convention drafted in London in 1946 by the Fiscal Committee of the League of Nations shows the following departure from the Mexico text:as regards both the rights mentioned in paragraph 3(a) and those mentioned in paragraph 3(b), the right to tax always rests with the State of residence of the grantor, and

where an enterprise of one of the Contracting States pays royalties to an enterprise of the other Contracting State and there is a particularly close economic connection between the two enterprises, then the royalties can be subjected to tax in the State where the rights in question are used.”

Paragraph 6Corresponds to paragraph 11 of the 1963 Draft Convention. Paragraph 6 of the 1963 Draft Convention was deleted and paragraph 11 was renumbered and amended when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 11 read as follows:“11. Paragraph 1 does not state whether or not exemptions in the State of source must be conditional upon the royalties being subject to tax in the State of residence. This question can be determined either way by bilateral negotiations.”

Paragraph 6 of the 1963 Draft Convention was deleted when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 6 read as follows:

“6. A study of more recent Conventions has revealed that the principles in the London draft have been adopted by most O.E.C.D. Member countries:the right to tax patent royalties and similar payments is conferred in principle, therefore, on the State of the grantor’s residence;

where patent royalties and similar payments are derived in connection with a permanent establishment situated in one of the States and forming part of an industrial or commercial enterprise carried on in the other State by the grantor, or are derived in connection with professional services performed by the grantor in one of the States and the grantor is a resident of the other State, then they are treated in accordance with the rules applicable under the Convention to income from an industrial or commercial enterprise or to income from the performance of professional services, respectively.”

Paragraph 7Corresponds to paragraph 12 of the 1963 Draft Convention. Paragraph 7 of the 1963 Draft Convention was deleted and paragraph 12 was amended and renumbered when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 12 read as follows:“12. Attention is drawn generally to the following case; the recipient of royalties arising in a Contracting State is a company resident in the other Contracting State; all or part of its capital is held by shareholders resident outside that other State; its practice is not to distribute its profits in the form of dividends; and it enjoys preferential taxation treatment (“private investment company”, “base company”). The question may arise in the case of such a company whether it is justifiable to allow in the State of source the tax exemption which is provided by the Article. It may be appropriate, when bilateral negotiations are being conducted, to agree upon special exceptions to the taxing rule laid down in this Article, in order to define the treatment applicable to such companies.”

Paragraph 7 of the 1963 Draft Convention was deleted when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 7 read as follows:“7. In addition to the rules in the London Model Convention drawn up by the League of Nations, more recent Conventions between O.E.C.D. Member countries contain special provisions regarding:rents in respect of cinematograph films. In most Conventions, these are treated like patent royalties and other similar payments; in some cases, however, they are considered as industrial or commercial income;

payments for the use of scientific or industrial equipment. These are treated like patent royalties and the like;

royalties representing more than an adequate consideration. In this case, the royalty stipulated differs from the amount that would normally be agreed in the same circumstances, this being a device to prevent income from being taxed by a particular State. The State in which the rights are used has the right to tax so much of the royalty or other payment as exceeds an adequate consideration.”

Paragraph 8Amended on 17 July 2008, by moving the fifth, penultimate and last sentences to paragraphs 8.1, 8.3 and 8.4 respectively, by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008. After 28 January 2003 and until 17 July 2008, paragraph 8 read as follows:“8. Paragraph 2 contains a definition of the term “royalties”. These relate, in general, to rights or property constituting the different forms of literary and artistic property, the elements of intellectual property specified in the text and information concerning industrial, commercial or scientific experience. The definition applies to payments for the use of, or the entitlement to use, rights of the kind mentioned, whether or not they have been, or are required to be, registered in a public register. The definition covers both payments made under a license and compensation which a person would be obliged to pay for fraudulently copying or infringing the right. The definition does not, however, apply to payments 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 (cf., for instance, paragraph 18 below). It should also be noted that the word “payment”, used in the definition, has a very wide meaning since the concept of payment means the fulfilment of the obligation to put funds at the disposal of the creditor in the manner required by contract or by custom. As a guide, certain explanations are given below in order to define the scope of Article 12 in relation to that of other Articles of the Convention, as regards, in particular, the provision of information.”

Paragraph 8 was previously amended on 28 January 2003 by the report entitled “The 2002 Update to the Model Tax Convention” adopted by the OECD Council on 28 January 2003. After 23 October 1997 and until 28 January 2003, paragraph 8 read as follows:“8. Paragraph 2 contains a definition of the term “royalties”. These relate, in general, to rights or property constituting the different forms of literary and artistic property, the elements of intellectual property specified in the text and information concerning industrial, commercial or scientific experience. The definition applies to payments for the use of, or the entitlement to use, rights of the kind mentioned, whether or not they have been, or are required to be, registered in a public register. The definition covers both payments made under a licence and compensation which a person would be obliged to pay for fraudulently copying or infringing the right. It should also be noted that the word “payment”, used in the definition, has a very wide meaning since the concept of payment means the fulfilment of the obligation to put funds at the disposal of the creditor in the manner required by contract or by custom. As a guide, certain explanations are given below in order to define the scope of Article 12 in relation to that of other Articles of the Convention, as regards, in particular, the provision of information.”

Paragraph 8 was previously amended on 23 October 1997 by the report entitled “The 1997 Update to the Model Tax Convention”, adopted by the OECD Council on 23 October 1997. After 23 July 1992 and until 23 October 1997, paragraph 8 read as follows:“8. Paragraph 2 contains a definition of the term “royalties”. These relate, in general, to rights or property constituting the different forms of literary and artistic property, the elements of intellectual property specified in the text and information concerning industrial, commercial or scientific experience. The definition applies to payments for the use of, or the entitlement to use, rights of the kind mentioned, whether or not they have been, or are required to be, registered in a public register. The definition covers both payments made under a licence and compensation which a person would be obliged to pay for fraudulently copying or infringing the right. As a guide, certain explanations are given below in order to define the scope of Article 12 in relation to that of other Articles of the Convention, as regards, in particular, the provision of information.”

Paragraph 8 was previously amended on 23 July 1992, by deleting the words “equipment renting and” in the last line, by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992. In the 1977 Model Convention and until 23 July 1992, paragraph 8 read as follows:“8. Paragraph 2 contains a definition of the term “royalties”. These relate, in general, to rights or property constituting the different forms of literary and artistic property, the elements of industrial and commercial property specified in the text and information concerning industrial, commercial or scientific experience. The definition applies to payments for the use of, or the entitlement to use, rights of the kind mentioned, whether or not they have been, or are required to be, registered in a public register. The definition covers both payments made under a licence and compensation which a person would be obliged to pay for fraudulently copying of infringing the right. As a guide, certain explanations are given below in order to define the scope of Article 12 in relation to that of other Articles of the Convention, as regards, in particular, equipment renting and the provision of information.”

Paragraph 8 of the 1977 Model Convention corresponded to paragraphs 13, 14 and 15 of the 1963 Draft Convention. Paragraph 8 of the 1963 Draft Convention was deleted and paragraphs 13, 14 and 15 were amended and incorporated into paragraph 8 when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, the heading preceding paragraph 13 was moved immediately before paragraph 8. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraphs 13, 14 and 15 read as follows:“13. Paragraph 2 contains a definition of the term “royalties”. These relate, in general, to rights or property constituting the different forms of literary and artistic property, the elements of industrial and commercial property specified in the text and information concerning industrial, commercial or scientific experience.

14. The definition applies to payments for the use of, or the entitlement to use, rights of the kind mentioned, whether or not they have been, or are required to be, registered in a public register.

15. The definition covers both payments made under a licence and compensation which a person would be obliged to pay for fraudulently copying or infringing the right.”

Paragraph 8 of the 1963 Draft Convention was deleted when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 8 read as follows:“8. In the light of the above considerations, the Fiscal Committee has prepared the Article on the direct taxation of patent royalties and similar payments.”

Paragraph 8.1Corresponds to the fifth sentence of paragraph 8 as it read before 17 July 2008. On 17 July 2008 paragraph 8.1 was renumbered as paragraph 8.5 (see history of paragraph 8.5) and the fifth sentence of paragraph 8 replaced paragraph 8.1 (see history of paragraph 8) by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008.

Paragraph 8.2Added on 17 July 2008 by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008.

Paragraph 8.3Corresponds to the penultimate sentence of paragraph 8 as it read before 17 July 2008. The penultimate sentence of paragraph 8 was amended incorporated into a new paragraph 8.3 (see history of paragraph 8) by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008.

Paragraph 8.4Corresponds to the last sentence of paragraph 8 as it read before 17 July 2008. On 17 July 2008 the last sentence of paragraph 8 was incorporated into a new paragraph 8.4 (see history of paragraph 8) by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008.

Paragraph 8.5Corresponds to paragraph 8.1 as it read on 17 July 2008 when paragraph 8.1 was renumbered as paragraph 8.5 by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008.

Paragraph 8.1 was added on 15 July 2005 by the report entitled “The 2005 Update to the Model Tax Convention”, adopted by the OECD Council on 15 July 2005.

Paragraph 9Replaced on 23 July 1992 when paragraph 9 of the 1977 Model Convention was deleted and a new paragraph 9 was added by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992, on the basis of two previous reports entitled “The Taxation of Income Derived from the Leasing of Industrial, Commercial or Scientific Equipment” (adopted by the OECD Council on 13 September 1983) and “The Taxation of Income Derived from the Leasing of Containers” (adopted by the OECD Council on 13 September 1983). In the 1977 Model Convention and until 23 July 1992, paragraph 9 read as follows:“9. A clear distinction must be made between royalties paid for the use of equipment, which fall under Article 12, and payments constituting consideration for the sale of equipment, which may, depending on the case, fall under Articles 7, 13, 14 or 21. Some contracts combine the hire element and the sale element, so that it sometimes proves difficult to determine their true legal import. In the case of credit sale agreements and hire purchase agreements, it seems clear that the sale element is the paramount use, because the parties have from the outset agreed that the ownership of the property in question shall be transferred from one to the other, although they have made this dependent upon the payment of the last instalment. Consequently, the instalments paid by the purchaser/hirer do not, in principle, constitute royalties. In the case, however, of lend-lease, and of leasing in particular, the sole, or at least the principal, purpose of the contract is normally that of hire, even if the hirer has the right thereunder to opt during its term to purchase the equipment in question outright. Article 12 therefore applies in the normal case to the rentals paid by the hirer, including all rentals paid by him up to the date he exercises any right to purchase.”

Paragraph 9 of the 1963 Draft Convention was replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 9 of the 1963 Draft Convention was amended and renumbered as paragraph 2 (see history of paragraph 2) and a new paragraph 9 was added.

Paragraph 9.1Added on 22 July 2010 by the report entitled the “2010 Update to the Model Tax Convention” adopted by the OECD Council on 22 July 2010.

Paragraph 9.2Added on 22 July 2010 by the report entitled the “2010 Update to the Model Tax Convention” adopted by the OECD Council on 22 July 2010.

Paragraph 9.3Added on 22 July 2010 by the report entitled the “2010 Update to the Model Tax Convention” adopted by the OECD Council on 22 July 2010.

Paragraph 10Amended on 29 April 2000, by replacing the words “industrial and commercial” with the word “business”, by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of the Annex of another report entitled “Issues Related to Article 14 of the OECD Model Tax Convention” (adopted by the OECD Committee on Fiscal Affairs on 27 January 2000). In the 1977 Model Convention and until 29 April 2000, paragraph 10 read as follows:“10. Rents in respect of cinematograph films are also treated as royalties, whether such films are exhibited in cinemas or on the television. It may, however, be agreed through bilateral negotiations that rents in respect of cinematograph films shall be treated as industrial and commercial profits and, in consequence, subjected to the provisions of Articles 7 and 9.”

Paragraph 10 of the 1977 Model Convention corresponded to paragraphs 16 and 17 of the 1963 Draft Convention. Paragraph 10 of the 1963 Draft Convention was amended and renumbered as paragraph 3 (see history of paragraph 3) and the preceding heading was moved with it when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraphs 16 and 17 of the 1963 Draft Convention were amended and renumbered and incorporated into paragraph 10 of the 1977 Model Convention. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraphs 16 and 17 read as follows:“16. In accordance with the prevailing practice in the Convention between O.E.C.D. Member countries, rents in respect of cinematograph films are also treated as royalties, whether such films are exhibited in Cinemas or on the television.

17. It may, however, be agreed through bilateral negotiations that rents in respect of cinematograph films shall be treated as industrial and commercial profits and, in consequence, subjected to the provisions of Articles 5, 7 and 9.”

Paragraph 10.1Added on 17 July 2008 by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008.

Paragraph 10.2Added on 17 July 2008 by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008.

Paragraph 11Amended on 17 July 2008 by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008. After 28 January 2003 and until 17 July 2008, paragraph 11 read as follows:“11. In classifying as royalties payments received as consideration for information concerning industrial, commercial or scientific experience, paragraph 2 alludes to the concept of “know-how”. Various specialist bodies and authors have formulated definitions of know-how which do not differ intrinsically. One such definition, given by the“Association des Bureaux pour la Protection de la Propriété Industrielle”(ANBPPI), states that “know-how is all the undivulged technical information, whether capable of being patented or not, that is necessary for the industrial reproduction of a product or process, directly and under the same conditions; inasmuch as it is derived from experience, know-how represents what a manufacturer cannot know from mere examination of the product and mere knowledge of the progress of technique”.”

Paragraph 11 was previously amended on 28 January 2003, by deleting the fourth and subsequent sentences, which were amended and incorporated into new paragraphs 11.1, 11.2, 11.4 and 11.6, by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003, on the basis of another report entitled “Treaty Characterisation Issues Arising from E‑Commerce” (adopted by the OECD Committee on Fiscal Affairs on 7 November 2002). After 29 April 2000 and until 28 January 2003, paragraph 11 read as follows:“11. In classifying as royalties payments received as consideration for information concerning industrial, commercial or scientific experience, paragraph 2 alludes to the concept of “know-how”. Various specialist bodies and authors have formulated definitions of know-how which do not differ intrinsically. One such definition, given by the“Association des Bureaux pour la Protection de la Propriété Industrielle”(ANBPPI), states that “know-how is all the undivulged technical information, whether capable of being patented or not, that is necessary for the industrial reproduction of a product or process, directly and under the same conditions; inasmuch as it is derived from experience, know-how represents what a manufacturer cannot know from mere examination of the product and mere knowledge of the progress of technique.” In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public. It is recognised that the grantor is not required to play any part himself in the application of the formulas granted to the licensee and that he does not guarantee the result thereof. This type of contract thus differs from contracts for the provision of services, in which one of the parties undertakes to use the customary skills of his calling to execute work himself for the other party. Thus, payments obtained as consideration for after-sales service, for services rendered by a seller to the purchaser under a guarantee, for pure technical assistance, or for an opinion given by an engineer, an advocate or an accountant, do not constitute royalties within the meaning of paragraph 2. Such payments generally fall under Article 7. In business practice, contracts are encountered which cover both know-how and the provision of technical assistance. One example, amongst others, of contracts of this kind is that of franchising, where the franchisor imparts his knowledge and experience to the franchisee and, in addition, provides him with varied technical assistance, which, in certain cases, is backed up with financial assistance and the supply of goods. The appropriate course to take with a mixed contract is, in principle, to break down, on the basis of the information contained in the contract or by means of a reasonable apportionment, the whole amount of the stipulated consideration according to the various parts of what is being provided under the contract, and then to apply to each part of it so determined the taxation treatment proper thereto. If, however, one part of what is being provided constitutes by far the principal purpose of the contract and the other parts stipulated therein are only of an ancillary and largely unimportant character, then it seems possible to apply to the whole amount of the consideration the treatment applicable to the principal part.”

Paragraph 11 was previously amended on 29 April 2000, by deleting the words “or Article 14”, by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of the Annex of another report entitled “Issues Related to Article 14 of the OECD Model Tax Convention” (adopted by the OECD Committee on Fiscal Affairs on 27 January 2000). After 23 July 1992 and until 29 April 2000, paragraph 11 read as follows:“11. In classifying as royalties payments received as consideration for information concerning industrial, commercial or scientific experience, paragraph 2 alludes to the concept of “know-how”. Various specialist bodies and authors have formulated definitions of know-how which do not differ intrinsically. One such definition, given by the “Association des Bureaux pour la Protection de la Propriété Industrielle” (ANBPPI), states that “know-how is all the undivulged technical information, whether capable of being patented or not, that is necessary for the industrial reproduction of a product or process, directly and under the same conditions; inasmuch as it is derived from experience, know-how represents what a manufacturer cannot know from mere examination of the product and mere knowledge of the progress of technique.” In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public. It is recognised that the grantor is not required to play any part himself in the application of the formulas granted to the licensee and that he does not guarantee the result thereof. This type of contract thus differs from contracts for the provision of services, in which one of the parties undertakes to use the customary skills of his calling to execute work himself for the other party. Thus, payments obtained as consideration for after-sales service, for services rendered by a seller to the purchaser under a guarantee, for pure technical assistance, or for an opinion given by an engineer, an advocate or an accountant, do not constitute royalties within the meaning of paragraph 2. Such payments generally fall under Article 7 or Article 14. In business practice, contracts are encountered which cover both know-how and the provision of technical assistance. One example, amongst others, of contracts of this kind is that of franchising, where the franchisor imparts his knowledge and experience to the franchisee and, in addition, provides him with varied technical assistance, which, in certain cases, is backed up with financial assistance and the supply of goods. The appropriate course to take with a mixed contract is, in principle, to break down, on the basis of the information contained in the contract or by means of a reasonable apportionment, the whole amount of the stipulated consideration according to the various parts of what is being provided under the contract, and then to apply to each part of it so determined the taxation treatment proper thereto. If, however, one part of what is being provided constitutes by far the principal purpose of the contract and the other parts stipulated therein are only of an ancillary and largely unimportant character, then it seems possible to apply to the whole amount of the consideration the treatment applicable to the principal part.”

Paragraph 11 as it read after on 23 July 1992 corresponded to paragraph 12 of the 1977 Model Convention. On 23 July 1992 paragraph 11 of the 1977 Model Convention was deleted and paragraph 12 was renumbered as paragraph 11 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 12 of the 1963 Draft Convention was replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 12 of the 1963 Draft Convention, was amended and renumbered as paragraph 7 (see history of paragraph 7) and a new paragraph 12 was added.

Paragraph 11 of the 1977 Model Convention was deleted on 23 July 1992 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992. In the 1977 Model Convention and until 23 July 1992, paragraph 11 read as follows:“11. The rules set out above in regard to rents in respect of cinematograph films could also be applied in regard to rentals derived by a shipping enterprise from the hire of its containers for the conveyance of goods on land after leaving the ship. It is considered, however, that where the hire of the containers is a supplementary or incidental activity of a transport company, the income should be treated as profits falling under Article 8.”

Paragraph 11 of the 1963 Draft Convention was replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 11 of the 1963 Draft Convention was amended and renumbered as paragraph 6 (see history of paragraph 6) and a new paragraph 11 was added.

Paragraph 11.1Corresponds to the fourth and fifth sentences of paragraph 11. On 28 January 2003 the fourth and fifth sentences of paragraph 11 were incorporated into a new paragraph 11.1 (see history of paragraph 11) by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003, on the basis of another report entitled “Treaty Characterisation Issues Arising from E‑Commerce” (adopted by the OECD Committee on Fiscal Affairs on 7 November 2002). New paragraph 11.1.

Paragraph 11.2Corresponds to the sixth and eighth sentences of paragraph 11. On 28 January 2003 the sixth and eighth sentences of paragraph 11 were incorporated into a new paragraph 11.2 (see history of paragraph 11) by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003, on the basis of another report entitled “Treaty Characterisation Issues Arising from E‑Commerce” (adopted by the OECD Committee on Fiscal Affairs on 7 November 2002).

Paragraph 11.3Added on 28 January 2003 by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003, on the basis of another report entitled “Treaty Characterisation Issues Arising from E‑Commerce” (adopted by the OECD Committee on Fiscal Affairs on 7 November 2002).

Paragraph 11.4Amended on 17 July 2008 by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008. After 28 January 2003 and until 17 July 2008, paragraph 11.4 read as follows:“11.4 Examples of payments which should therefore not be considered to be received as consideration for the provision of know-how but, rather, for the provision of services, include:

• payments obtained as consideration for after-sales service,

• payments for services rendered by a seller to the purchaser under a guarantee,

• payments for pure technical assistance,

• payments for an opinion given by an engineer, an advocate or an accountant, and

• payments for advice provided electronically, for electronic communications with technicians or for accessing, through computer networks, a trouble-shooting database such as a database that provides users of software with non-confidential information in response to frequently asked questions or common problems that arise frequently.”

Paragraph 11.4 was added on 28 January 2003 by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003, on the basis of another report entitled “Treaty Characterisation Issues Arising from E‑Commerce” (adopted by the OECD Committee on Fiscal Affairs on 7 November 2002). New paragraph 11.4 includes examples previously included in the seventh sentence of paragraph 11 as it read before 28 January 2003 (see history of paragraph 11).

Paragraph 11.5Added on 28 January 2003 by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003, on the basis of another report entitled “Treaty Characterisation Issues Arising from E‑Commerce” (adopted by the OECD Committee on Fiscal Affairs on 7 November 2002).

Paragraph 11.6Corresponds to the last 4 sentences paragraph 11. On 28 January 2003 most of the last four sentences of paragraph 11 were incorporated into a new paragraph 11.6 (see history of paragraph 11) by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003, on the basis of another report entitled “Treaty Characterisation Issues Arising from E‑Commerce” (adopted by the OECD Committee on Fiscal Affairs on 7 November 2002).

Paragraph 12Amended on 29 April 2000, by moving all but the first sentence of paragraph 12 into new paragraphs 12.1 and 12.2 and adding three new sentences after the first sentence, by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000. After 23 July 1992 and until 29 April 2000, paragraph 12 read as follows:“12. Whether payments received as consideration for computer software may be classified as royalties poses difficult problems but is a matter of considerable importance in view of the rapid development of computer technology in recent years and the extent of transfers of such technology across national borders. Software may be described as a programme, or series of programmes, containing instructions for a computer required either for the operational processes of the computer itself (operational software) or for the accomplishment of other tasks (application software). It can be transferred through a variety of media, for example in writing, on a magnetic tape or disc, or on a laser disc. It may be standardised with a wide range of applications or be tailor-made for single users. It can be transferred as an integral part of computer hardware or in an independent form available for use on a variety of hardware. The rights in computer software are a form of intellectual property. Research into the practices of OECD member countries has established that all but one protect software rights either explicitly or implicitly under copyright law. Transfers of rights occur in many different ways ranging from the alienation of the entire rights to the sale of a product which is subject to restrictions on the use to which it is put. The consideration paid can also take numerous forms. These factors may make it difficult to determine where the boundary lies between software payments that are properly to be regarded as royalties and other types of payment.”

Paragraph 12 of the 1977 Model Convention was replaced on 23 July 1992 when it was renumbered as paragraph 11 (see history of paragraph 11) and a new paragraph 12 was added by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992, on the basis of Appendix 3 to the Report entitled “The Tax Treatment of Software”, adopted by the OECD Council on 23 July 1992.

Paragraph 12.1Corresponds to the second, third, forth and fifth sentences of paragraph 12. On 29 April 2000 the second, third, forth and fifth sentences of paragraph 12 were amended and incorporated into a new paragraph 12.1 (see history of paragraph 12) by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000.

Paragraph 12.2Corresponds to the sixth, seventh, eighth, ninth and tenth sentences of paragraph 12. On 29 April 2000 the sixth, seventh, eighth, ninth and tenth sentences of paragraph 12 were incorporated into a new paragraph 12.2 (see history of paragraph 12) by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000.

Paragraph 13Replaced on 29 April 2000 when the first five sentences of paragraph 13 were deleted, the remaining sentences of paragraph 13 were incorporated into a new paragraph 13.1 and a new paragraph 13 was added by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000. After 23 July 1992 and until 29 April 2000, paragraph 13 read as follows:“13. Three situations are considered. The first is of payments made where less than the full rights in software are transferred. In a partial transfer of rights the consideration is likely to represent a royalty only in very limited circumstances. One such case is where the transferor is the author of the software (or has acquired from the author his rights of distribution and reproduction) and he has placed part of his rights at the disposal of a third party to enable the latter to develop or exploit the software itself commercially, for example by development and distribution of it. It should be noted that even where a software payment is properly to be regarded as a royalty there are difficulties in applying the copyright provisions of the Article to software royalties since paragraph 2 requires that software should be classified as a literary, artistic or scientific work. None of these categories seems entirely apt but treatment as a scientific work might be the most realistic approach. Countries for which it is not possible to attach software to any of those categories might be justified in adopting in their bilateral treaties an amended version of paragraph 2 which either omits all references to the nature of copyrights or refers specifically to software.”

Paragraph 13 of the 1977 Model Convention was replaced on 23 July 1992 when it was renumbered as paragraph 18 (see history of paragraph 18) and a new paragraph 13 was added by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992, on the basis of Appendix 3 to the Report entitled “The Tax Treatment of Software”, adopted by the OECD Council on 23 July 1992.

Paragraph 13.1Corresponds to the fifth, sixth and seventh sentence of paragraph 13. On 29 April 2000 the fifth, sixth and seventh sentence of paragraph 13 were amended and incorporated into a new paragraph 13.1 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000.

Paragraph 14Replaced on 29 April 2000 when paragraph 14 was deleted and a new paragraph 14 was added by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000. After 23 July 1992 and until 29 April 2000, paragraph 14 read as follows:“14. In other cases, the acquisition of the software will generally be for the personal or business use of the purchaser. The payment will then fall to be dealt with as commercial income in accordance with Articles 7 or 14. It is of no relevance that the software is protected by copyright or that there may be restrictions on the use to which the purchaser can put it.”

Paragraph 14 of the 1977 Model Convention was replaced on 23 July 1992 when it was amended and renumbered as paragraph 19 (see history of paragraph 19) and a new paragraph 14 was added by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992, on the basis of Appendix 3 to the Report entitled “The Tax Treatment of Software”, adopted by the OECD Council on 23 July 1992.

Paragraph 14.1Added on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000.

Paragraph 14.2Added on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000.

Paragraph 14.3Added on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000.

Paragraph 14.4Added on 17 July 2008 by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008.

Paragraph 15Amended on 17 July 2008 by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008. After 29 April 2000 and until 17 July 2008, paragraph 15 read as follows:“15. Where consideration is paid for the transfer of the full ownership of the rights in the copyright, the payment cannot represent a royalty and the provisions of the Article are not applicable. Difficulties can arise where there are extensive but partial alienation of rights involving:

• exclusive right of use during a specific period or in a limited geographical area;

• additional consideration related to usage;

• consideration in the form of a substantial lump sum payment.”

Paragraph 15 was previously amended on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000. After 23 July 1992 and until 29 April 2000, paragraph 15 read as follows:“15. The second situation is where the payments are made as consideration for the alienation of rights attached to the software. It is clear that where consideration is paid for the transfer of the full ownership, the payment cannot represent a royalty and the provisions of the Article are not applicable. Difficulties can arise where there are extensive but partial alienation of rights involving:

• exclusive right of use during a specific period or in a limited geographical area;

• additional consideration related to usage;

• consideration in the form of a substantial lump sum payment.”

Paragraph 15 of the 1977 Model Convention was replaced on 23 July 1992 when it was renumbered as paragraph 20 (see history of paragraph 20), the preceding heading was moved with it and a new paragraph 15 was added by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992, on the basis of Appendix 3 to the Report entitled “The Tax Treatment of Software”, adopted by the OECD Council on 23 July 1992.

Paragraph 16Amended on 17 July 2008 by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008. After 29 April 2000 and until 17 July 2008, paragraph 16 read as follows:“16. Each case will depend on its particular facts but in general such payments are likely to be commercial income within Article 7 or a capital gains matter within Article 13 rather than royalties within Article 12. That follows from the fact that where the ownership of rights has been alienated in full or in part, 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.”

Paragraph 16 was previously amended on 29 April 2000, by deleting “or 14” in the second line, by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000. After 23 July 1992 and until 29 April 2000, paragraph 16 read as follows:“16. Each case will depend on its particular facts but in general such payments are likely to be commercial income within Article 7 or 14 or a capital gains matter within Article 13 rather than royalties within Article 12. That follows from the fact that where the ownership of rights has been alienated in full or in part, 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 installments or, in the view of most countries, by the fact that the payments are related to a contingency.”

Paragraph 16 of the 1977 Model Convention was replaced on 23 July 1992 when it was renumbered as paragraph 21 (see history of paragraph 21) and a new paragraph 16 was added by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992, on the basis of Appendix 3 to the Report entitled “The Tax Treatment of Software”, adopted by the OECD Council on 23 July 1992.

Paragraph 17Amended on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000. After 23 July 1992 and until 29 April 2000, paragraph 17 read as follows:“17. The third situation is where software payments are made under mixed contracts. Examples of such contracts include sales of computer hardware with built-in software and concessions of the right to use software combined with the provision of services. The methods set out in paragraph 11 above for dealing with similar problems in relation to patent royalties and know-how are equally applicable to computer software. Where necessary the total amount of the consideration payable under a contract should be broken down on the basis of the information contained in the contract or by means of a reasonable apportionment with the appropriate tax treatment being applied to each apportioned part.”

Paragraph 17 of the 1977 Model Convention was replaced paragraph 17 when paragraph 17 was renumbered as paragraph 22 (see history of paragraph 22), the preceding heading was moved with it and a new paragraph 17 was added by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992, on the basis of Appendix 3 to the Report entitled “The Tax Treatment of Software”, adopted by the OECD Council on 23 July 1992.

Paragraph 17.1Added on 28 January 2003 by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003, on the basis of another report entitled “Treaty Characterisation Issues Arising from E‑Commerce” (adopted by the OECD Committee on Fiscal Affairs on 7 November 2002).

Paragraph 17.2Added on 28 January 2003 by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003, on the basis of another report entitled “Treaty Characterisation Issues Arising from E‑Commerce” (adopted by the OECD Committee on Fiscal Affairs on 7 November 2002).

Paragraph 17.3Added on 28 January 2003 by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003, on the basis of another report entitled “Treaty Characterisation Issues Arising from E‑Commerce” (adopted by the OECD Committee on Fiscal Affairs on 7 November 2002).

Paragraph 17.4Added on 28 January 2003 by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003, on the basis of another report entitled “Treaty Characterisation Issues Arising from E‑Commerce” (adopted by the OECD Committee on Fiscal Affairs on 7 November 2002).

Paragraph 18Amended on 28 January 2003 by the report entitled “The 2002 Update to the Model Tax Convention” adopted by the OECD Council on 28 January 2003. After 23 July 1992 and until 28 January 2003, paragraph 18 read as follows:“18. The suggestions made above regarding mixed contracts could also be applied in regard to certain performances by artists and, in particular, in regard to an orchestral concert given by a conductor or a recital given by a musician. The fee for the musical performance, together with that paid for any simultaneous radio broadcasting thereof, seems to fall to be treated under Article 17. Where, whether under the same contract or under a separate one, the musical performance is recorded and the artist has stipulated that he be paid royalties on the sale or public playing of the records, then so much of the payment received by him as consists of such royalties falls to be treated under Article 12.”

Paragraph 18 as it read after 23 July 1992 corresponded to paragraph 13 of the 1977 Model Convention. On 23 July 1992, paragraph 18 of the 1977 Model Convention was renumbered as paragraph 23 (see history of paragraph 23) and paragraph 13 was renumbered as paragraph 18 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 13 of the 1963 Draft Convention was replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 13 of the 1963 Draft Convention was incorporated into paragraph 8 (see history of paragraph 8), the heading preceding paragraph 13 was moved with it and a new paragraph 13 was added.

Paragraph 19Corresponds to paragraph 14 of the 1977 Model Convention as it read before 23 July 1992. On that date paragraph 19 of the 1977 Model Convention was renumbered as paragraph 24 (see history of paragraph 24) and paragraph 14 was renumbered as paragraph 19 and amended, by deleting the second sentence thereof as a consequence of the change to the definition of the term “royalties” in paragraph 2 of Article 12, by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992. In the 1977 Model Convention and until 23 July 1992, paragraph 14 read as follows:“14. It is further pointed out that variable or fixed payments for the working of mineral deposits, sources or other natural resources are governed by Article 6 and do not, therefore, fall within the present Article. If two Contracting States should have difficulty from the legal standpoint in applying this distinction in regard to consideration for the use of, or the right to use, equipment, they could add to the text of paragraph 2, after the words “industrial, commercial or scientific equipment”, the words “not constituting immovable property referred to in Article 6”.”

Paragraph 14 of the 1977 Model Convention corresponded to paragraph 18 of the 1963 Draft Convention. Paragraph 14 of the 1963 Draft Convention was incorporated into paragraph 8 (see history of paragraph 8) when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 18 of the 1963 Draft Convention was amended and renumbered as paragraph 14 of the 1977 Model Convention. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 18 read as follows:“18. It is further pointed out that variable or fixed payments for the working of mineral deposits, sources or other natural resources are governed by Article 6 on the taxation of income from immovable property and do not, therefore, fall within the present Article.”

Paragraph 20Corresponds to paragraph 15 of the 1977 Model Convention as it read before 23 July 1992. On that date paragraph 20 of the 1977 Model Convention was renumbered as paragraph 25 (see history of paragraph 25), paragraph 15 was renumbered as paragraph 20 and the heading preceding paragraph 15 was moved with it by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 15 of the 1977 Model Convention corresponded to paragraph 19 of the 1963 Draft Convention. Paragraph 15 of the 1963 Draft Convention was incorporated into paragraph 8 (see history of paragraph 8) when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 19 of the 1963 Draft Convention was amended and renumbered as paragraph 15 of the 1977 Model Convention and the preceding heading was moved with it. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 19 read as follows:“19. Certain States consider that dividends, interest and royalties arising from sources in their territory and payable to individuals or legal persons who are residents of other States fall outside the scope of the arrangement made to prevent them from being taxed both in the State of source and in the State of the recipient’s residence when the recipient possesses a permanent establishment in the former State. Paragraph 3 of the Article is not based on such a conception which is sometimes referred to as “the force of attraction of the permanent establishment”. It does not stipulate that royalties arising to a resident of a Contracting State from a source situated in the territory of the other State must, by a kind of legal presumption, or fiction even, be related to a permanent establishment which that resident may happen to possess in the latter State, so that the said State would not be obliged to limit its taxation in such a case. The paragraph merely provides that in the State of source the royalties are taxable as part of the profits of the permanent establishment there owned by the recipient residing in the other State, if they are paid in respect of rights or property forming part of the assets of the permanent establishment or otherwise effectively connected with that establishment. In that case, paragraph 3 relieves the State of source of the royalties from any limitations under the Article. The foregoing explanations accord with those in the Commentaries on Article 7 on the taxation of business profits.”

Paragraph 21Amended on 22 July 2010 by the report entitled “The 2010 Update to the Model Tax Convention”, adopted by the OECD Council on 22 July 2010. After 28 January 2003 and until 22 July 2010, paragraph 21 read as follows:“21. It has been suggested that the paragraph could give rise to abuses through the transfer of rights or property to permanent establishments set up solely for that purpose in countries that offer preferential treatment to royalty income. Apart from the fact that such abusive transactions might trigger the application of domestic anti-abuse rules, it must be recognised that a particular location can only constitute a permanent establishment if a business is carried on therein and, also, that the requirement that a right or property be “effectively connected” to such a location requires that the right or property be genuinely connected to that business.”

Paragraph 21 was added on 28 January 2003 by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003, on the basis of another report entitled “Issues Arising under Article 5 (Permanent Establishment) of the Model Tax Convention” (adopted by the OECD Committee on Fiscal Affairs on 7 November 2002).

Paragraph 21 as it read before 29 April 2000 was deleted by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000 on the basis of the Annex of another report entitled “Issues Related to Article 14 of the OECD Model Tax Convention” (adopted by the OECD Committee on Fiscal Affairs on 27 January 2000). After 23 July 1992 and until 29 April 2000, paragraph 21 read as follows:“21. The rules set out above also apply where the beneficiary of the royalties has in the other Contracting State, for the purpose of performing any of the kinds of independent personal services mentioned in Article 14, a fixed base with which the right or property in respect of which the royalties are paid is effectively connected.”

Paragraph 21 as it read after 23 July 1992 corresponded to paragraph 16 of the 1977 Model Convention. On 23 July 1992 paragraph 21 of the 1977 Model Convention was renumbered as paragraph 26 (see history of paragraph 26) and paragraph 16 was renumbered as paragraph 21 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 16 of the 1963 Draft Convention was replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 16 of the 1963 Draft Convention, was incorporated into paragraph 10 (see history of paragraph 10) and a new paragraph 16 was added.

Paragraph 21.1Added on 22 July 2010 by the report entitled the “2010 Update to the Model Tax Convention” adopted by the OECD Council on 22 July 2010.

Paragraph 21.2Added on 22 July 2010 by the report entitled the “2010 Update to the Model Tax Convention” adopted by the OECD Council on 22 July 2010.

Paragraph 22Amended on 28 January 2003, by adding the three sentences at the end of the paragraph, by the report entitled “The 2002 Update to the Model Tax Convention” adopted by the OECD Council on 28 January 2003. After 23 July 1992 and until 28 January 2003, paragraph 22 read as follows:“22. The purpose of this paragraph is to restrict the operation of the provisions concerning the taxation of royalties in cases 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 paid exceeds the amount which would have been agreed upon by the payer and the beneficial owner had they stipulated at arm’s length. It provides that in such a case the provisions of the Article apply only to that last-mentioned amount and that the excess part of the royalty shall remain taxable according to the laws of the two Contracting States due regard being had to the other provisions of the Convention.”

Paragraph 22 as it read after 23 July 1992 corresponded to paragraph 17 of the 1977 Model Convention. On 23 July 1992 paragraph 22 of the 1977 Model Convention was deleted and the preceding heading was moved immediately before paragraph 27 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992. At the same time, paragraph 17 was renumbered as paragraph 22 and the heading preceding paragraph 17 was moved with it.

Paragraph 17 of the 1977 Model Convention corresponded to paragraph 20 of the 1963 Draft Convention. Paragraph 17 of the 1963 Draft Convention was incorporated into paragraph 10 (see history of paragraph 10) when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 20 of the 1963 Draft Convention was amended and renumbered as paragraph 17 of the 1977 Model Convention and the preceding heading was moved with it. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 20 read as follows:“20. The purpose of this paragraph is to restrict the operation of the provisions concerning the taxation of royalties in cases where, owing to a special relationship between the payer and the recipient or between both of them and some other person, the amount of the royalties paid exceeds the amount which would have been agreed upon by the payer and the recipient had they stipulated at arm’s length. It provides that in such a case the provisions of the Article apply only to that last-mentioned amount and that the excess part of the royalty shall remain taxable according to the laws of the two Contracting States, due regard being had to the other provisions of the Convention.”

In the 1977 Model Convention and until it was deleted on 23 July 1992, paragraph 22 read as follows:“22. The observation made byPortugal,SpainandTurkeyon the Commentary on Article 8 (cf. paragraph 28 of the Commentary thereon) applies also to paragraph 11 of the present Commentary for the leasing of containers.”

Paragraph 22 was replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. Paragraph 22 of the 1963 Draft Convention, was renumbered as paragraph 19 (see history of paragraph 24) and a new paragraph 22 and the heading preceding it were added when the 1977 Model Convention was adopted.

Paragraph 23Corresponds to paragraph 18 of the 1977 Model Convention as it read before 23 July 1992. On that date paragraph 23 of the 1977 Model Convention was renumbered as paragraph 31 (see history of paragraph 32), the preceding headings were moved with it and paragraph 18 was renumbered as paragraph 23 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 18 of the 1977 Model Convention corresponded to paragraph 21 of the 1963 Draft Convention. Paragraph 18 of the 1963 Draft Convention was amended and renumbered as paragraph 14 (see history of paragraph 19) when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 21 of the 1963 Draft Convention was amended and renumbered as paragraph 18 of the 1977 Model Convention. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 21 read as follows:“21. It is clear from the text that for this clause to apply the payment held excessive must be due to a special relationship between the payer and the recipient or between both of them and some other person. There may be cited as examples cases where royalties are paid to an individual or legal person who directly or indirectly controls the payer, or who is directly or indirectly controlled by him or is subordinate to a group having common interest with him. These examples, moreover, are similar or analogous to the cases contemplated by Article 9 on the taxation of associated enterprises.”

Paragraph 24Corresponds to paragraph 19 of the 1977 Model Convention as it read before 23 July 1992. On that date paragraph 24 of the 1977 Model Convention was amended and renumbered as paragraph 32 (see history of paragraph 33) and paragraph 19 was renumbered as paragraph 24 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 19 of the 1977 Model Convention corresponded to paragraph 22 of the 1963 Draft Convention. Paragraph 19 of the 1963 Draft Convention, was amended and renumbered as paragraph 15 (see history of paragraph 20) and the preceding heading was moved with it when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 22 of the 1963 Draft Convention was renumbered as paragraph 19 of the 1977 Model Convention.

Paragraph 25Corresponds to paragraph 20 of the 1977 Model Convention as it read before 23 July 1992. On that date paragraph 25 of the 1977 Model Convention was amended and renumbered as paragraph 33 (see history of paragraph 35) and paragraph 20 was renumbered as paragraph 25 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 20 of the 1977 Model Convention corresponded to paragraph 23 of the 1963 Draft Convention. Paragraph 20 of the 1963 Draft Convention was amended and renumbered as paragraph 17 (see history of paragraph 22) when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 23 of the 1963 Draft Convention was amended and renumbered as paragraph 20 of the 1977 Model Convention. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 23 read as follows:“23. With regard to the taxation treatment to be applied to the excess part of the royalty, the exact nature of such excess will need to be ascertained according to the circumstances of each case, in order to determine the category of income in which it should be classified for the purpose of applying the provisions of the tax laws of the States concerned and the provisions of the Convention for the avoidance of double taxation.”

Paragraph 26Corresponds to paragraph 21 of the 1977 Model Convention as it read before 23 July 1992. On that date paragraph 26 of the 1977 Model Convention was deleted and paragraph 21 was renumbered as paragraph 26 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 21 of the 1977 Model Convention corresponded to paragraph 24 of the 1963 Draft Convention. Paragraph 21 of the 1963 Draft Convention was amended and renumbered as paragraph 18 (see history of paragraph 23) when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 24 of the 1963 Draft Convention was amended and renumbered as paragraph 21 of the 1977 Model Convention. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 24 read as follows:“24. It goes without saying that should the principles and rules of their respective laws oblige the two Contracting States to apply different Articles of the Convention for the purpose of taxing the excess, it will be necessary to resort to the mutual agreement procedure provided by the Convention in order to resolve the difficulty.”

Paragraph 26 of the 1977 Model Convention, until it was deleted on 23 July 1992, read as follows:“26. Finlandreserves the right to tax royalties at source. However, Finland would be prepared to provide an exemption from tax for copyright royalties in respect of any literary, artistic or scientific work.”

Paragraph 26 of the 1963 Draft Convention was replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 26 of the 1963 Draft Convention was deleted and a new paragraph 26 was added. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 26 read as follows:“26. The other Member countries, for their part, declare that they are prepared to allow such States, by bilateral Conventions and subject to reciprocity, a limited right to tax as described above.”

Paragraph 27Added on 17 July 2008 by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008.

Paragraph 27 as it read before 28 January 2003 was deleted by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003. After 29 April 2000 and until 28 January 2003, paragraph 27 read as follows:“27. Canadadoes not adhere to paragraphs 14 through 14.3. In Canada, payments by a user of computer software pursuant to a contract that requires that the source code or program be kept confidential, are payments for the use of a secret formula or process and thus are royalties within the meaning of paragraph 2 of the Article.”

Paragraph 27 was amended on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000. After 23 July 1992 and until 29 April 2000, paragraph 27 read as follows:“27. Canadadoes not adhere to paragraph 14. In Canada, payments by a user of computer software pursuant to a contract that requires that the source code or program be kept confidential, are payments for the use of a secret formula or process and thus are royalties within the meaning of paragraph 2 of the Article.”

Paragraph 27 of the 1977 Model Convention was replaced on 23 July 1992 when it was renumbered as paragraph 34 (see history of paragraph 34), the preceding heading was moved immediately before paragraph 27 and a new paragraph 27 was added by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 27.1Added on 17 July 2008 by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008.

Paragraph 28Amended on 17 July 2008, by adding Portugal to the list of countries making the reservation together with other amendments, by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008. After 15 July 2005 and until 17 July 2008, paragraph 28 read as follows:“28. MexicoandSpaindo not adhere to the interpretation in paragraphs 14, 15 and 17.1 to 17.4. Mexico and Spain hold the view that payments relating to software fall within the scope of the Article where less than the full rights to software are transferred either if the payments are in consideration for the right to use a copyright on software for commercial exploitation or if they relate to software acquired for the business use of the purchaser, when, in this last case, the software is not absolutely standardised but somehow adapted to the purchaser.”

Paragraph 28 was previously amended on 15 July 2005, by adding Mexico as a country making the reservation, by the report entitled “The 2005 Update to the Model Tax Convention”, adopted by the OECD Council on 15 July 2005. After 28 January 2003 and until 15 July 2005, paragraph 28 read as follows:“28. Spaindoes not adhere to the interpretation in paragraphs 14, 15 and 17.1 to 17.4. Spain holds the view that payments relating to software fall within the scope of the Article where less than the full rights to software are transferred either if the payments are in consideration for the right to use a copyright on software for commercial exploitation or if they relate to software acquired for the business use of the purchaser, when, in this last case, the software is not absolutely standardised but somehow adapted to the purchaser.”

Paragraph 28 was previously amended on 28 January 2003 by the report entitled “The 2002 Update to the Model Tax Convention” adopted by the OECD Council on 28 January 2003. After 23 July 1992 and until 28 January 2003, paragraph 28 read as follows:“28. Spaindoes not adhere to the interpretation in paragraphs 14 and 15. Spain holds the view that payments relating to software fall within the scope of the Article where less than the full rights to software are transferred, either if the payments are in consideration for the right to use a copyright on software for commercial exploitation or if they relate to software acquired for the personal or business use of the purchaser.”

Paragraph 28 of the 1977 Model Convention was replaced on 23 July 1992 when it was amended and renumbered as paragraph 35 (see history of paragraph 36) and a new paragraph 28 was added by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 29Added on 17 July 2008 by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008.

Paragraph 29 as it read before 15 July 2005 was deleted by the report entitled “The 2005 Update to the Model Tax Convention”, adopted by the OECD Council on 15 July 2005. After 28 January 2003 and until 15 July 2005, paragraph 29 read as follows:“29. Mexicoholds the view that payments relating to software fall within the scope of the Article where less than the full rights to software are transferred either if the payments are in consideration for the right to use a copyright on software for commercial exploitation or if they relate to software acquired for the business use of the purchaser.”

Paragraph 29 was replaced on 28 January 2003 when it was deleted and a new paragraph 29 was added by the report entitled “The 2002 Update to the Model Tax Convention” adopted by the OECD Council on 28 January 2003. After 23 July 1992 and until 28 January 2003, paragraph 29 read as follows:“29. TheUnited Statesbelieves that in interpreting the definition of “royalties” in paragraph 2 of the Article, with respect to payments for software, it should be understood that where a payment for the acquisition of software for the personal or business use of the purchaser is measured by reference to the productivity or use of such software, the payment may represent a royalty under the Article.”

Paragraph 29 of the 1963 Draft Convention was replaced on 23 July 1992 when it was deleted and a new paragraph 27 was added by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until 23 July 1992, paragraph 29 read as follows:“29. Turkeycannot accept a rate of tax which is lower than 20 per cent.”

Paragraph 30Added on 28 January 2003 by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2002.

Paragraph 30 as it read before 29 April 2000 was deleted by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000. After 23 July 1992 and until 29 April 2000, paragraph 30 read as follows:“30. In relation to paragraphs 13 and 14,Australiatakes the view that payments made for the right to copy or adapt the software in a manner which would, without the permission of the copyright owner, constitute an infringement of copyright, are royalties.”

Paragraph 30 of the 1977 Model Convention was replaced on 23 July 1992 when it was amended and renumbered as paragraph 42 (see history of paragraph 47), the preceding heading was moved with it and a new paragraph 30 was added by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 31Replaced on 21 September 1995 when paragraph 31 was renumbered as paragraph 32 (see history of paragraph 32), the preceding headings were moved with it and a new paragraph 31 was added by the report entitled “The 1995 Update to the Model Tax Convention” adopted by the OECD Council on 21 September 1995.

Paragraph 31.1Added on 23 October 1997 by the report entitled “The 1997 Update to the Model Tax Convention”, adopted by the OECD Council on 23 October 1997.

Paragraph 31.2Added on 17 July 2008 by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008.

Paragraph 31.3Corresponds to paragraph 32 as it read on 15 July 2014 when it was renumbered as paragraph 31.3 by the report entitled “The 2014 Update to the Model Tax Convention”, adopted by the OECD Council on 15 July 2014.

Paragraph 32 was added on 22 July 2010 by the report entitled “The 2010 Update to the Model Tax Convention”, adopted by the OECD Council on 22 July 2010.

Paragraph 32 as it read before 29 April 2000 was deleted by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000. After 21 September 1995 and until 29 April 2000, paragraph 32 read as follows:“32. Australiareserves the right to tax royalties that, under Australian law, have a source in Australia.”

Paragraph 32 as it read after 21 September 1995 corresponded to paragraph 31. On 21 September 1995 paragraph 32 was renumbered as paragraph 33 (see history of paragraph 33), paragraph 31 was renumbered as paragraph 32 and the headings preceding paragraph 31 were moved with it by the report entitled “The 1995 Update to the Model Tax Convention” adopted by the OECD Council on 21 September 1995.

Paragraph 31 as it read after 23 July 1992 corresponded to paragraph 23 of the 1977 Model Convention. On 23 July 1992 paragraph 31 of the 1977 Model Convention was renumbered as paragraph 43 (see history of paragraph 48), paragraph 23 was renumbered as paragraph 31 and the headings preceding paragraph 23 were moved with it by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 23 of the 1963 Draft Convention was replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 23 of the 1963 Draft Convention was renumbered as paragraph 20 (see history of paragraph 25), the headings preceding paragraph 28 were moved immediately before paragraph 23 and a new paragraph 23 was added.

Paragraph 31.4Corresponds to paragraph 46.2 as it read on 15 July 2014 when it was renumbered as paragraph 31.4 by the report entitled “The 2014 Update to the Model Tax Convention”, adopted by the OECD Council on 15 July 2014.

Paragraph 46.2 was amended on 17 July 2008, by replacing the reference to the “fifth dash” with a reference to the “sixth dash”, by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008. After 28 January 2003 and until 17 July 2008, paragraph 46.2 read as follows:“46.2 Greecedoes not adhere to the interpretation in the fifth dash of paragraph 11.4 and takes the view that all concerning payments are falling within the scope of the Article.”

Paragraph 46.2 was added on 28 January 2003 by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003.

Paragraph 31.5Corresponds to paragraph 46.3 as it read on 15 July 2014 when it was amended and renumbered as paragraph 31.5 by the report entitled “The 2014 Update to the Model Tax Convention”, adopted by the OECD Council on 15 July 2014.

Paragraph 46.3 was added on 28 January 2003 by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003.

Paragraph 32Renumbered on 15 July 2014 as paragraph 31.3 (see history of paragraph 31.3) by the Report entitled “The 2014 Update to the Model Tax Convention”, adopted by the Council of the OECD on 15 July 2014.

Paragraph 32.1Renumbered on 15 July 2014 as paragraph 38 (see history of paragraph 38) by the Report entitled “The 2014 Update to the Model Tax Convention”, adopted by the Council of the OECD on 15 July 2014.

Paragraph 33Amended on 23 October 1997, by deleting Austria from the list of countries making the reservation, by the report entitled “The 1997 Update to the Model Tax Convention”, adopted by the OECD Council on 23 October 1997. After 21 September 1995 and until 23 October 1997, paragraph 33 read as follows:“33. AustriaandGreeceare unable to accept a provision which would preclude them, in bilateral conventions for the avoidance of double taxation, from stipulating a clause conferring on them the right to tax royalties at a rate of up to 10 per cent.”

Paragraph 33 as it read after 21 September 1995 corresponded to paragraph 32. On 21 September 1995 paragraph 33 was renumbered as paragraph 35 (see history of paragraph 35) and paragraph 32 was renumbered as paragraph 33, by the report entitled “The 1995 Update to the Model Tax Convention” adopted by the OECD Council on 21 September 1995.

Paragraph 32 as it read after 23 July 1992 corresponded to paragraph 24 of the 1977 Model Convention. On 23 July 1992 paragraph 24 was amended, by deleting Luxembourg from the list of countries making the reservation and renumbered as paragraph 32 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992. In the 1977 Model Convention and until 23 July 1992, paragraph 24 read as follows:“24. Austria,GreeceandLuxembourgare unable to accept a provision which would preclude them, in bilateral conventions for the avoidance of double taxation, from stipulating a clause conferring on them the right to tax royalties at a rate of up to 10 per cent.”

Paragraph 24 of the 1977 Model Convention corresponded to paragraphs 25 and 28 of the 1963 Draft Convention. Paragraph 24 of the 1963 Draft Convention was amended and renumbered as paragraph 21 (see history of paragraph 26) when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraphs 25 and 28 of the 1963 Draft Convention were amended and renumbered as paragraph 24 of the 1977 Model Convention and the heading preceding paragraph 25 was deleted. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraphs 25 and 28 and the heading preceding paragraph 25 read as follows:1 “III. SPECIAL DEROGATION IN FAVOUR OF CERTAIN COUNTRIES.

25. The following Member countries, Greece, Luxembourg, Portugal and Spain consider that they are unable to relinquish all taxation at the source as regards royalties arising in their territories and paid to residents of another State. They are prepared, however, to limit their tax at the source on such royalties to a maximum of 5 per cent of the gross amount of the royalties.

28. Austria is unable to accept a provision which would preclude it, in bilateral Conventions for the avoidance of double taxation, from stipulating a clause conferring on it the right to tax royalties at a rate up to 10 per cent.”

Paragraph 34Added on 23 October 1997 by the report entitled “The 1997 Update to the Model Tax Convention”, adopted by the OECD Council on 23 October 1997.

Paragraph 34 as it read before 21 September 1995 was deleted by the report entitled “The 1995 Update to the Model Tax Convention”, adopted by the OECD Council on 21 September 1995. After 23 July 1992 and until 21 September 1995, paragraph 34 read as follows:“34. Francereserves the right to retain some tax on royalties of French origin when flows of royalties between France and the other Contracting State are unbalanced to France’s disadvantage.”

Paragraph 34 as it read after 23 July 1992 corresponded to paragraph 27 of the 1977 Model Convention. On 23 July 1992 paragraph 27 of the 1977 Model Convention was renumbered as paragraph 34 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 27 of the 1963 Draft Convention was replaced when the 1977 Model Convention was adopted on 11 April 1977. At that time, paragraph 27 of the 1963 Draft Convention was deleted and a new paragraph 27 was added. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until it was deleted when the 1977 Model Convention was adopted, paragraph 27 read as follows:“27. Whenever use is made of the above derogation in a bilateral Convention, the Contracting States are recommended to model the special clause giving a limited right to tax to the State of source on the formulas employed in paragraphs 1 and 2 of the Article on the taxation of interest. In such a case it will also be necessary to define the State of source. For this purpose, the formula employed in paragraph 5 of the Article on the taxation of interest will serve as a model.”

Paragraph 35Amended on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000. After 21 September 1995 and until 29 April 2000, paragraph 35 read as follows:“35. Canadareserves its position on paragraph 1 and wishes to retain a 10 per cent rate of tax at source in its bilateral conventions. However, Canada would be prepared to provide an exemption from tax for copyright royalties in respect of a cultural, dramatic, musical or artistic work, but not including royalties in respect of motion picture films and works on film or videotape or other means of reproduction for use in connection with television.”

Paragraph 35 as it read after 21 September 1995 corresponded to paragraph 33. On 21 September 1995 paragraph 35 was amended and renumbered as paragraph 36 (see history of paragraph 36) and paragraph 33 was renumbered as paragraph 35 by the report entitled “The 1995 Update to the Model Tax Convention”, adopted by the OECD Council on 21 September 1995.

Paragraph 33 as it read after 23 July 1992 corresponded to paragraph 25 of the 1977 Model Convention. On 23 July 1992 paragraph 25 of the 1977 Model Convention was amended and renumbered as paragraph 33 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992. In the 1977 Model Convention and until 23 July 1992, paragraph 25 read as follows:“25. Canadareserves its position on paragraph 1 and wishes to retain a 10 per cent rate of tax at source in its bilateral conventions. However, Canada would be prepared to provide an exemption from tax for copyright royalties in respect of any literary, dramatic, musical or artistic work, but not including royalties in respect of motion picture films, and films or video tapes for use in connection with television.”

Paragraph 25 of the 1977 Model Convention corresponded to paragraph 30 of the 1963 Draft Convention. Paragraph 25 of the 1963 Draft Convention was amended and renumbered as paragraph 24 (see history of paragraph 33) when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 30 of the 1963 Draft Convention was amended and renumbered as paragraph 25 of the 1977 Model Convention. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 30 read as follows:“30. Canada reserves its position on paragraphs 1 and 2 of this Article. However the Canadian authorities would be prepared to provide an exemption from tax for copyright royalties and other like payments made in respect of the production or reproduction of any literary, dramatic, musical or artistic work (but not including rents or royalties in respect of motion picture films, including films or video tapes for use in connection with television) derived from sources within one of the Contracting States by a resident of the other Contracting State.”

Paragraph 36Amended on 22 July 2010, by changing the list of countries making the reservation by adding Chile and Slovenia and deleting Japan and Spain, by the report entitled “The 2010 Update to the Model Tax Convention”, adopted by the OECD Council on 22 July 2010. After 28 January 2003 and until 22 July 2010, paragraph 36 read as follows:“36. Australia,Japan,Korea,Mexico,New Zealand,Poland,Portugal, theSlovak Republic,SpainandTurkeyreserve the right to tax royalties at source.”

Paragraph 36 was previously amended on 28 January 2003, by adding the Slovak Republic to the list of countries making the reservation, by the report entitled “The 2002 Update to the Model Tax Convention” adopted by the OECD Council on 28 January 2003. After 29 April 2000 and until 28 January 2003, paragraph 36 read as follows:“36. Australia,Japan,Korea,Mexico,New Zealand,Poland,Portugal,SpainandTurkeyreserve the right to tax royalties at source.”

Paragraph 36 was previously amended on 29 April 2000, by adding Australia to the list of countries making the reservation, by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000. After 23 October 1997 and until 29 April 2000, paragraph 36 read as follows:“36. Korea,Japan,Mexico,New Zealand,Poland,Portugal,SpainandTurkeyreserve the right to tax royalties at source.”

Paragraph 36 was previously amended on 23 October 1997, by adding Korea and Poland to the list of countries making the reservation, by the report entitled “The 1997 Update to the Model Tax Convention”, adopted by the OECD Council on 23 October 1997. After 21 September 1995 and until 23 October 1997, paragraph 36 read as follows:“36. Japan,Mexico,New Zealand,Portugal,SpainandTurkeyreserve the right to tax royalties at source.”

Paragraph 36 as it read after 21 September 1995 corresponded to paragraph 35. On 21 September 1995 paragraph 36 was renumbered as paragraph 37 (see history of paragraph 37), paragraph 35 was renumbered as paragraph 36 and amended by adding Mexico to the list of countries making the reservation by the report entitled “The 1995 Update to the Model Tax Convention”, adopted by the OECD Council on 21 September 1995. After 23 July 1992 and until 21 September 1995, paragraph 35 read as follows:“35. Japan,New Zealand,Portugal,SpainandTurkeyreserve the right to tax royalties at source.”

Paragraph 35 as it read after 23 July 1992 corresponded to paragraph 28 of the 1977 Model Convention. On 23 July 1992 paragraph 28 of the 1977 Model Convention was amended, by adding Turkey to the list of countries making the reservation, and renumbered as paragraph 35 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992. In the 1977 Model Convention and until 23 July 1992, paragraph 28 read as follows:“28. Japan,New Zealand,PortugalandSpainreserve the right to tax royalties at source.”

Paragraph 28 of the 1963 Draft Convention was replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 28 of the 1963 Draft Convention was amended and renumbered as paragraph 24 (see history of paragraph 33), the headings preceding paragraph 28 were moved immediately before paragraph 23 and a new paragraph 28 was added when the 1977 Model Convention was adopted.

Paragraph 37Corresponds to paragraph 36 as it read after 21 September 1995. On that date paragraph 37 was renumbered as paragraph 38 (see history of paragraph 38) and paragraph 36 was renumbered as paragraph 37, by the report entitled “The 1995 Update to the Model Tax Convention”, adopted by the OECD Council on 21 September 1995.

Paragraph 36 was added on 23 July 1992 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 38Corresponds to paragraph 32.1 as it read on 15 July 2014 when paragraph 32.1 was renumbered as paragraph 38 by the report entitled “The 2014 Update to the Model Tax Convention”, adopted by the OECD Council on 15 July 2014.

Paragraph 32.1 was added on 22 July 2010 by the report entitled the “2010 Update to the Model Tax Convention” adopted by the OECD Council on 22 July 2010

Paragraph 38 as it read before 15 July 2005 was deleted by the report entitled “The 2005 Update to the Model Tax Convention”, adopted by the OECD Council on 15 July 2005. After 21 September 1995 and until 15 July 2005, paragraph 38 read as follows:“38. GreeceandMexicoreserve the right to exclude from the scope of this Article royalties arising from property or rights created or assigned mainly for the purpose of taking advantage of this Article and not forbona fidecommercial reasons.”

Paragraph 38 as it read after 21 September 1995 corresponded to paragraph 40. On 21 September 1995 paragraph 38 was renumbered as paragraph 44 (see history of paragraph 44), paragraph 40 was amended, by adding Mexico to the list of countries making the reservation, and renumbered as paragraph 38 and the heading preceding paragraph 39 was moved immediately before paragraph 38, by the report entitled “The 1995 Update to the Model Tax Convention”, adopted by the OECD Council on 21 September 1995. After 23 July 1992 and until 21 September 1995, paragraph 40 read as follows:“40. Greecereserves its right to exclude from the scope of this Article royalties arising from property or rights created or assigned mainly for the purpose of taking advantage of this Article and not forbona fidecommercial reasons.”

Paragraph 40 was added on 23 July 1992 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 39Replaced on 15 July 2005 when paragraph 39 was deleted and a new paragraph 39 was added by the report entitled “The 2005 Update to the Model Tax Convention”, adopted by the OECD Council on 15 July 2005. After 21 September 1995 and until 15 July 2005, paragraph 39 read as follows:“39. Australiareserves the right to tax income derived from the leasing of industrial, commercial or scientific equipment and of containers as royalties under its double taxation agreements, where such income, under Australian law, has a source in Australia.”

Paragraph 39 as it read after 21 September 1995 corresponded to paragraph 43 of the Commentary on Article 7. On 21 September 1995 paragraph 39 was renumbered as paragraph 40 (see history of paragraph 40) and paragraph 43 of the Commentary on Article 7 was renumbered as paragraph 39 of the Commentary on Article 12 by the report entitled “The 1995 Update to the Model Tax Convention”, adopted by the OECD Council on 21 September 1995.

Paragraph 43 of the Commentary on Article 7 was added on 23 July 1992 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992, on the basis of paragraph 28 of a previous report entitled “The Taxation of Income Derived from the Leasing of Industrial, Commercial or Scientific Equipment” (adopted by the OECD Council on 13 September 1983).

Paragraph 40Amended on 15 July 2014, by deleting Hungary from the list of countries making the reservation, by the Report entitled “The 2014 Update to the Model Tax Convention”, adopted by the Council of the OECD on 15 July 2014. After 22 July 2010 and until 15 July 2014, paragraph 40 read as follows:“40. Canada,Chile, theCzech Republic,Hungary,Koreaand theSlovak Republicreserve the right to add the words “for the use of, or the right to use, industrial, commercial or scientific equipment” to paragraph 2.”

Paragraph 40 was previously amended on 22 July 2010, by adding Chile to the list of countries making the reservation, by the report entitled “The 2010 Update to the Model Tax Convention”, adopted by the OECD Council on 22 July 2010. After 17 July 2008 and until 22 July 2010, paragraph 40 read as follows:“40. Canada, theCzech Republic,Hungary,Koreaand theSlovak Republicreserve the right to add the words “for the use of, or the right to use, industrial, commercial or scientific equipment” to paragraph 2.”

Paragraph 40 was previously amended on 17 July 2008, by deleting Poland from the list of countries making the reservation, by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008. After 28 January 2003 and until 17 July 2008, paragraph 40 read as follows:“40. Canada,the Czech Republic,Hungary,Korea,Polandand theSlovak Republicreserve the right to add the words “for the use of, or the right to use, industrial, commercial or scientific equipment” to paragraph 2.”

Paragraph 40 was previously amended on 28 January 2003, by adding the Slovak Republic to the list of countries making the reservation, by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003. After 23 October 1997 and until 28 January 2003, paragraph 40 read as follows:“40. Canada, theCzech Republic,Hungary,Korea and Polandreserve the right to add the words “for the use of, or the right to use, industrial, commercial or scientific equipment” to paragraph 2.”

Paragraph 40 was previously amended on 23 October 1997, by adding the Czech Republic, Hungary, Korea and Poland to the list of countries making the reservation, by the report entitled “The 1997 Update to the Model Tax Convention”, adopted by the OECD Council on 23 October 1997. After 21 September 1995 and until 23 October 1997, paragraph 40 read as follows:“40. Canadareserves the right to add the words “for the use of, or the right to use, industrial, commercial or scientific equipment” to paragraph 2.”

Paragraph 40 as it read after 21 September 1995 corresponded to paragraph 39. On 21 September 1995 paragraph 40 was amended and renumbered as paragraph 38 (see history of paragraph 38), paragraph 39 was renumbered as paragraph 40 and the heading preceding paragraph 39 was moved immediately before paragraph 38 by the report entitled “The 1995 Update to the Model Tax Convention” adopted by the OECD Council on 21 September 1995.

Paragraph 39 and the heading preceding it were added on 23 July 1992 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 41Amended on 17 July 2008, by deleting Poland from the list of countries making the reservation, by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008. After 28 January 2003 and until 17 July 2008, paragraph 41 read as follows:“41. Greece,Italy,PolandandMexicoreserve the right to continue to include income derived from the leasing of industrial, commercial or scientific equipment and of containers in the definition of “royalties” as provided for in paragraph 2 of Article 12 of the 1977 Model Convention.”

Paragraph 41 was previously amended on 28 January 2003, by adding Poland to the list of countries making the reservation, by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003. After 21 September 1995 and until 28 January 2003, paragraph 41 read as follows:“41. Greece,ItalyandMexicoreserve the right to continue to include income derived from the leasing of industrial, commercial or scientific equipment and of containers in the definition of “royalties” as provided for in paragraph 2 of Article 12 of the 1977 Model Convention.”

Paragraph 41 as it read after 21 September 1995 corresponded to paragraph 45 of the Commentary on Article 7 as it read before 21 September 1995. On 21 September 1995 paragraph 41 was renumbered as paragraph 45 (see history of paragraph 45) and paragraph 45 of the Commentary on Article 7 was renumbered as paragraph 41 of the Commentary on Article 12 and amended by adding Mexico to the list of countries making the reservation, by the report entitled “The 1995 Update to the Model Tax Convention” adopted by the OECD Council on 21 September 1995. After 23 July 1992 and until 21 September 1995, paragraph 41 read as follows:“41. GreeceandItalyand reserve the right to continue to include income derived from the leasing of industrial, commercial or scientific equipment and of containers in the definition of “royalties” as provided for in paragraph 2 of Article 12 of the 1977 Model Convention.”

Paragraph 45 of the Commentary on Article 7 was added on 23 July 1992 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992, on the basis, in the case of Italy, of paragraph 30 of a previous report entitled “The Taxation of Income Derived from the Leasing of Industrial, Commercial or Scientific Equipment” (adopted by the OECD Council on 13 September 1983) and of paragraph 48 of another report entitled “The Taxation of Income Derived from the Leasing of Containers” (also adopted by the OECD Council on 13 September 1983).

Paragraph 41.1Added on 17 July 2008 by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008.

Paragraph 42Corresponds to paragraph 46 of the Commentary on Article 7 as it read before 21 September 1995. On that date paragraph 42 was renumbered as paragraph 47 (see history of paragraph 47), the heading preceding paragraph 42 was moved with it and paragraph 46 of the Commentary on Article 7 was renumbered as paragraph 42 of the Commentary on Article 12 on 21 September 1995 by the report entitled “The 1995 Update to the Model Tax Convention”, adopted by the OECD Council on 21 September 1995.

Paragraph 46 of the Commentary on Article 7 was added on 23 July 1992 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992, on the basis of paragraph 31 of a previous report entitled “The Taxation of Income Derived from the Leasing of Industrial, Commercial or Scientific Equipment” (adopted by the OECD Council on 13 September 1983) and of paragraph 49 of another report entitled “The Taxation of Income Derived from the Leasing of Containers” (also adopted by the OECD Council on 13 September 1983).

Paragraph 43Deleted on 17 July 2008 by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008. After 28 January 2003 and until 17 July 2008, paragraph 43 read as follows:“43. PolandandPortugalreserve the right to treat and tax as royalties all software income that is not derived from a total transfer of the rights attached to the software.”

Paragraph 43 was amended on 28 January 2003, by adding Poland as a country making the reservation and by incorporating the second sentence of paragraph 43 into paragraph 43.1, by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003. After 21 September 1995 and until 28 January 2003, paragraph 43 read as follows:“43. Portugalreserves the right to treat and tax as royalties all software income that is not derived from a total transfer of the rights attached to the software. Portugal also reserves the right to tax at source as royalties income from the leasing of industrial, commercial or scientific equipment and of containers, as well as income arising from technical assistance in connection with the use of, or the right to use, such equipment and containers.”

Paragraph 43 as it read after 21 September 1995 corresponded to paragraph 37. On 21 September 1995 paragraph 43 was renumbered as paragraph 48 (see history of paragraph 48) and paragraph 37 was renumbered as paragraph 43 by the report entitled “The 1995 Update to the Model Tax Convention”, adopted by the OECD Council on 21 September 1995.

Paragraph 37 was added on 23 July 1992 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 43.1Corresponds with minor amendment to the second sentence of paragraph 43 as it read before 28 January 2003 (see history of paragraph 43). Paragraph 43.1 was added by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003.

Paragraph 44Amended on 22 July 2010, by deleting Spain from the list of countries making the reservation, by the report entitled “The 2010 Update to the Model Tax Convention”, adopted by the OECD Council on 22 July 2010. After 21 September 1995 and until 22 July 2010, paragraph 44 read as follows:“44. PortugalandSpainreserve the right to tax at source as royalties income arising from technical assistance in connection with the use of, or right to use, rights or information of the type referred to in paragraph 2 of the Article.”

Paragraph 44 as it read before 21 September 1995 corresponded to paragraph 38. On 21 September 1995 paragraph 38 was renumbered as paragraph 44 by the report entitled “The 1995 Update to the Model Tax Convention”, adopted by the OECD Council on 21 September 1995.

Paragraph 38 was added on 23 July 1992 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 45Deleted on 15 July 2014 by the Report entitled “The 2014 Update to the Model Tax Convention”, adopted by the Council of the OECD on 15 July 2014. After 21 September 1995 and until 15 July 2014, paragraph 45 read as follows:“45. Spainreserves its right to continue to adhere in its conventions to a definition of royalties which includes income from the leasing of industrial, commercial or scientific equipment and of containers.”

Paragraph 45 corresponded to paragraph 41 as it read before 21 September 1995. Paragraph 41 was renumbered as paragraph 45 by the report entitled “The 1995 Update to the Model Tax Convention”, adopted by the OECD Council on 21 September 1995.

Paragraph 41 was added on 23 July 1992 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 46Corresponds to paragraph 49 of the Commentary on Article 7 as it read before 21 September 1995. On that date paragraph 49 of the Commentary on Article 7 was renumbered as paragraph 46 of the Commentary on Article 12 by the report entitled “The 1995 Update to the Model Tax Convention”, adopted by the OECD Council on 21 September 1995.

Paragraph 49 of the Commentary on Article 7 was added on 23 July 1992 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992, on the basis of paragraph 31 of a previous report entitled “The Taxation of Income Derived from the Leasing of Industrial, Commercial or Scientific Equipment” (adopted by the OECD Council on 13 September 1983).

Paragraph 46.1Amended on 28 January 2003, by adding Mexico as a country making the reservation, by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003. After 29 April 2000 and until 28 January 2003, paragraph 46.1 read as follows:“46.1 TheUnited Statesreserves the right to treat as a royalty a gain derived from the alienation of a property described in paragraph 2 of the Article, provided that the gain is contingent on the productivity, use or disposition of the property.”

Paragraph 46.1 was added on 29 April 2000 by the report entitled “The 2000 Update to the Model Tax Convention”, adopted by the OECD Committee on Fiscal Affairs on 29 April 2000.

Paragraph 46.2Renumbered on 15 July 2014 as paragraph 31.4 (see history of paragraph 31.4) by the Report entitled “The 2014 Update to the Model Tax Convention”, adopted by the Council of the OECD on 15 July 2014.

Paragraph 46.3Renumbered on 15 July 2014 as paragraph 31.5 (see history of paragraph 31.5) by the Report entitled “The 2014 Update to the Model Tax Convention”, adopted by the Council of the OECD on 15 July 2014.

Paragraph 47Deleted, together with the preceding heading, on 22 July 2010 by the report entitled “The 2010 Update to the Model Tax Convention”, adopted by the OECD Council on 22 July 2010. After 21 September 1995 and until 22 July 2010, paragraph 47 and the preceding heading read as follows:“Paragraph 347. Italyreserves the right to subject royalties and profits from the alienation of rights or property giving rise to royalties to the taxes imposed by its law whenever the recipient thereof has a permanent establishment in Italy, even if the rights or property in respect of which the royalties are paid is not effectively connected with such permanent establishment.”

Paragraph 47 as read after 21 September 1995 corresponded to paragraph 42. On 21 September 1995 paragraph 42 was renumbered as paragraph 47 and the heading preceding paragraph 42 was moved with it by the report entitled “The 1995 Update to the Model Tax Convention”, adopted by the OECD Council on 21 September 1995.

Paragraph 42 as it read after 23 July 1992 corresponded to paragraph 30 of the 1977 Model Convention. On 23 July 1992 paragraph 30 of the 1977 Model Convention was renumbered as paragraph 42 and the heading preceding paragraph 30 was moved with it by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 30 of the 1977 Model Convention corresponded to paragraph 31 of the 1963 Draft Convention. Paragraph 30 of the 1963 Draft Convention was amended and renumbered as paragraph 25 (see history of paragraph 35) and the preceding heading, “Paragraphs 1 and 2”, was deleted when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At the same time, paragraph 31 of the 1963 Draft Convention was amended and renumbered as paragraph 30 of the 1977 Model Convention and the preceding heading was moved with it. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 31 read as follows:“31. Italy reserves the right to subject royalties and profits from the alienation of rights or property giving rise to royalties to the taxes imposed by its law whenever the recipient thereof has a permanent establishment in Italy, even if the rights or property in respect of which the royalties are paid is not effectively connected with such permanent establishment.”

Paragraph 48Amended on 15 July 2014, by adding Estonia and Israel to the list of countries making the reservation, by the Report entitled “The 2014 Update to the Model Tax Convention”, adopted by the Council of the OECD on 15 July 2014. After 22 July 2010 and until 15 July 2014, paragraph 48 read as follows:“48. Australia,Belgium,Canada,Chile, theCzech Republic,France,Mexico, theSlovak RepublicandSloveniareserve the right, in order to fill what they consider as a gap in the Article, to propose a provision defining the source of royalties by analogy with the provisions of paragraph 5 of Article 11, which deals with the same problem in the case of interest.”

Paragraph 48 was previously amended on 22 July 2010, by adding Australia, Chile and Slovenia to the list of countries making the reservation, by the report entitled “The 2010 Update to the Model Tax Convention”, adopted by the OECD Council on 22 July 2010. After 28 January 2003 and until 22 July 2010, paragraph 48 read as follows:“48. Belgium,Canada, theCzech Republic,Mexico,Franceand theSlovak Republicreserve the right, in order to fill what they consider as a gap in the Article, to propose a provision defining the source of royalties by analogy with the provisions of paragraph 5 of Article 11, which deals with the same problem in the case of interest.”

Paragraph 48 was previously amended on 28 January 2003, by adding the Slovak Republic to the list of countries making the reservation, by the report entitled “The 2002 Update to the Model Tax Convention”, adopted by the OECD Council on 28 January 2003. After 23 October 1997 and until 28 January 2003, paragraph 48 read as follows:“48. Belgium,Canada,the Czech Republic,MexicoandFrancereserve the right, in order to fill what they consider as a gap in the Article, to propose a provision defining the source of royalties by analogy with the provisions of paragraph 5 of Article 11, which deals with the same problem in the case of interest.”

Paragraph 48 was previously amended on 23 October 1997, by adding the Czech Republic to the list of countries making the reservation, by the report entitled “The 1997 Update to the Model Tax Convention”, adopted by the OECD Council on 23 October 1997. After 21 September 1995 and until 23 October 1997, paragraph 48 read as follows:“48. Belgium,Canada,MexicoandFrancereserve the right, in order to fill what they consider as a gap in the Article, to propose a provision defining the source of royalties by analogy with the provisions of paragraph 5 of Article 11, which deals with the same problem in the case of interest.”

Paragraph 48 as it read after 21 September 1995 corresponded to paragraph 43. On 21 September 1995 paragraph 43 was amended, by adding Mexico to the list of countries making the reservation, and renumbered as paragraph 48 by the report entitled “The 1995 Update to the Model Tax Convention”, adopted by the OECD Council on 21 September 1995. After 23 July 1992 and until 21 September 1995, paragraph 43 read as follows:“43. Belgium,Canada, andFrancereserve the right, in order to fill what they consider as a gap in the Article, to propose a provision defining the source of royalties by analogy with the provisions of paragraph 5 of Article 11, which deals with the same problem in the case of interest.”

Paragraph 43 as it read after 23 July 1992 corresponded to paragraph 31 of the 1977 Model Convention. On 23 July 1992 paragraph 31 of the 1977 Model Convention was amended, by adding Canada and France to the list of countries making the reservation, and renumbered as paragraph 43 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992. In the 1977 Model Convention and until 23 July 1992, paragraph 31 read as follows:“31. Belgiumreserves the right, in order to fill what it considers as a gap in the Article, to propose a provision defining the source of royalties by analogy with the provision in paragraph 5 of Article 11, which deals with the same problem in the case of interest.”

Paragraph 31 of the 1963 Draft Convention was replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. Paragraph 31 of the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963), was amended and renumbered as paragraph 30 (see history of paragraph 47) and a new paragraph 31 was added when the 1977 Model Convention was adopted.

Paragraph 49Added on 15 July 2005 by the report entitled “The 2005 Update to the Model Tax Convention”, adopted by the OECD Council on 15 July 2005.

Paragraph 50Added on 17 July 2008 by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008.