ARTICLE 12

Royalties

The existing Convention provides that royalties derived from sources within one of the States by a resident of the other State shall be exempt from tax by the former State. The proposed Convention continues this exemption for royalties.

The term “royalties” is defined to include

(a) payments of any kind made as consideration for the use of, or the right to use,

copyrights of literary, artistic, or scientific works (but not including copyrights of motion picture films or films or tapes used for radio or television broadcasting), patents, designs, models, plans, secret processes or formulae, trademarks, or other like property or rights, or knowledge, experience, or skill (know-how) and

(b) gains derived from the sale, exchange or other disposition of such rights or property, but only if payment is contingent on productivity, use, or disposition of the property. If the payments are not so contingent, the capital gains Article applies.

The provisions of this Article do not apply if the recipient of a royalty has a permanent establishment in the State of source and the rights or property giving rise to the royalty is effectively connected to such permanent establishment. In such a case, the royalty may be taxed as industrial or commercial profits under Article 7 (Business Profits). Thus, the “force of attraction” principle is also abandoned with respect to royalties.

The source rule on royalties is different front the source rule found in most of our recent treaties and the rule in Section 861(a)(4) of the Internal Revenue Code. The proposed Convention provides that royalties shall be treated as income from sources within one of the States if paid by such State, a political subdivision, or a local authority thereof, or by a resident of that State. However,

(a) if the person paying the royalty has a permanent establishment in one of the States with which the right or property giving rise to the royalty is effectively connected and such royalties are borne by such permanent establishment, or

(b) if the person paying the royalty is a resident of one of the Contracting States and has a permanent establishment in a third State with which the right or property giving rise to the royalty is effectively connected and such royalties are borne by such permanent establishment such royalties are deemed to be from sources within the State in which the permanent establishment is located. This source rule is similar to the interest source rule found in Article 11 (Interest) of the proposed Convention and to the source rule for royalties under Belgian domestic law. On the United States side, since royalties are exempt at source, the source rule on royalties is relatively unimportant. However, on the Belgian side, because of the treatment given under Belgian law for excessive royalty payments, the source of royalty has importance. Under the proposed Convention, if excessive royalties are paid because the payor and the recipient are related, the provisions of the royalty Article apply only to so much of the royalty as would have been paid to an unrelated person. The excess payment may be taxed according to its own law by the State from which the royalty is derived. In the case of Belgium, Belgium would deny a deduction for the excess royalty payments, but, in the hands of the recipient, the payment would still be considered to be a royalty under Belgian domestic law. However, the recipient is not entitled to the benefits of this Article with respect to such excess.

If a nonresident has a permanent establishment in Belgium or the United States, royalties attributable to effectively connected with such permanent establishment are not subject to withholding but are subject to tax in Belgium or the United States at the rates normally applicable to industrial or commercial profits.