ARTICLE 12

Royalties

Paragraph 1 provides that royalties arising in a Contracting State which are paid to a resident of the other Contracting State may be taxed by that other State.

Paragraph 2 provides that the State in which the royalty arises may also tax a royalty paid to a beneficial owner who is a resident of the other State, but the tax may not exceed 12.5 percent of the royalty.

Paragraph 3 contains a definition of royalties. This definition is similar to that in the U.S. Model, but it treats as royalties payments received as consideration for the use of motion pictures, or films, tapes or other means of reproduction used for radio or television. The term "royalties" does not encompass management fees, which are covered by the provisions of Article 7 (Business Profits) or 14 (Independent Personal Services), or payments under a bona fide costsharing arrangement.

Paragraph 4 provides that royalties attributable to a permanent establishment or regular base which the beneficial owner of the royalties being a resident of a Contracting State maintains in the other Contracting State are taxable in accordance with the provisions of Article 7 or Article 14, as the case may be, rather than under this Article.

If an excessive amount of royalty by reason of a special relationship between the payer

and the beneficial owner of the royalty, or between both of them and a third person, then pursuant to paragraph 5 the provisions of Article 12 shall only apply to the portion of the payment which would have been agreed upon in the absence of the special relationship. The excess amount may be taxed by each Contracting State, in accordance with its own law, including the Convention where applicable. In the case of the United States, the excess amount may, for example, be taxed as a dividend, in which case the provisions of Article 10 (Dividends) may apply.

Paragraph 6 identifies the State in which royalties are deemed to arise. The general rule is that royalties arise in a Contracting State when the payer is that State itself, a political subdivision or local authority, or a resident of that State. Payments for the use of or the right to use property or rights in a Contracting State are deemed, however, to arise in the State in which they are used. This rule reflects the U.S. statutory rule, which sources royalties in the State in which the property or rights are used. Thus, if a U.S. resident licensor receives royalties from a resident of Barbados for the use of a patent in Barbados or in a third State the royalty will be deemed to arise in Barbados. If, however, the Barbadian resident uses the patent in the United Sates, the royalty will be deemed to arise in the United States. These rules are relevant for purposes of calculating the U.S. foreign tax credit for Barbadian income taxes as well as for purposes of this Article. See paragraphs 1 and 3 of Article 23 (Relief from Double Taxation).

This Article is subject to the saving clause of paragraph 3 of Article 1 (General Scope). Therefore, royalties derived by a U.S. citizen who is a resident of Barbados may be taxed by the United States without regard to this Article.