The Use of the OECD Commentary
Elgar Tax Law and Practice series
Chapter 7: ROYALTIES (ART. 12)
Art. 12 § 1 provides that the royalties arising in the SC and beneficially owned by a resident of the RC shall be taxable only in the RC. The Model adopts the principle of exclusive taxation of royalties in the State of the beneficial owner’s residence and admits only one exception at Art. 12 § 3 with respect to the force of attraction on outbound royalties effectively connected to a PE (see supra at paras 4.79–4.71 and infra at para 7.78). This is one of the few situations in which the Model prevents double taxation by attributing an exclusive right to tax to only one of the CSs, by using the expression royalties ‘shall be taxable only’ in the RC, thereby precluding other CSs from taxing. In spite of the principle of exclusive taxation of royalties in the RC adopted in the Model, many countries adopt a treaty clause (similar to that adopted for dividends and interest by the Model) that also attributes taxing rights to the SC, so that an intermediate approach has been adopted, according to which royalties may be taxed in the RC, but the SC maintains the right to impose a tax. The SC is, however, free to give up all taxation on royalties paid to non-residents, but if the SC decides to tax outbound royalties its exercise of this right is limited by a capped relief to be attributed by the RC for the tax charged in the SC (see Artt. 23A or 23B).
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