Article 14 of the Israel U.S. Tax Treaty - Royalties

1. Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State-

(a) May be taxed by both Contracting States, but

(b) Shall not be taxed by the other Contracting State at a rate in excess of 10 percent of the gross amount of a copyright or film royalty or at a rate in excess of 15 percent of the gross amount of an industrial royalty.

2. For purposes of this Article-

(a) Copyright or film royalties are payments of any kind made as consideration for the use of, or the right to use, copyrights of literary, artistic, or scientific works, including copyrights of motion picture films or films or tapes used for radio or television broadcasting;

(b) Industrial royalties are payments of any kind made as consideration for the use of, or the right to use, patents, designs, models, plans, secret processes or formulae, trademarks, or other like property or rights and

(c) Copyright or film royalties and industrial royalties include gains derived from the sale, exchange, or other disposition of any such property or rights to the extent that the amounts realized on such sale, exchange, or other disposition for consideration are contingent on the productivity, use, or disposition of such property or rights.

3. Paragraph (1) (b) shall not apply if the royalty is treated, under paragraph

(6) of Article 8 (Business Profits), as industrial or commercial profits attributable to a permanent establishment which the recipient has in the other Contracting State. In such a case, the provisions of Article 8 (Business Profits) shall apply.

4. Where an amount is paid to a related person and would be treated as a royalty but for the fact that it exceeds an amount which would have been paid to an unrelated person, the provisions of this Article shall apply only to so much of the amount as would have been paid to an unrelated person. In such a case, the excess amount may be taxed by each Contracting State according to its own law, including the provisions of this Convention where applicable.

Commentary to Article 14 of the Israel - U.S. Tax Treaty

Paragraph (1) provides that royalties derived by a resident of one Contracting State from sources within the other Contracting State may be taxed by both Contracting States. However, paragraph (1) limits the tax in that other Contracting State to a rate not to exceed ten percent of the gross amount of a copyright or film royalty or fifteen percent of the gross amount of an industrial royalty.

The term "copyright or film royalties" is defined in paragraph (2)(a) as payments of any kind made as consideration for the use of, or the right to use, copyrights of literary, artistic, or scientific works, including copyrights of motion picture films or films or tapes used for radio or television broadcasting.

The term "industrial royalties" is defined in paragraph (2)(b) as payments of any kind made as consideration for the use of, or the right to use, patents, designs, models, plans, secret processes or formulae, trademarks, or other like property or rights.

Copyright or film royalties and industrial royalties include gains derived from the sale, exchange, or other disposition of such property or rights to the extent the amounts realized on such sale, exchange or other disposition for consideration are contingent on the productivity, use, or disposition of the property or rights.

If the amounts realized are not so contingent, the provisions of Article 15 (Capital Gains) may apply. The term "royalties" does not include royalties and other payments in respect of the exploitation of natural resources. Such payments are covered by the provisions of Article 7 (Income from Real Property). See also paragraph (6) of Article 8 (Business Profits).

Paragraph (3) provides that the tax rate limitations of paragraph (1) shall not apply if the royalty is treated, under paragraph (6) of Article 8 (Business Profits), as industrial or commercial profits attributable to a permanent establishment which the recipient has in the other Contracting State. In such a case, the provisions of Article 8 (Business Profits) will apply.

If excessive royalties are paid to a related person, paragraph (4) provides that the Article does not apply to the excessive portion of the royalty. The excessive portion may be taxed by each Contracting State according to its own laws, including the Israel U.S. Tax Treaty where applicable. Thus, the excessive portion may be treated as a dividend or interest, or in whatever other manner is appropriate. But if, for example, it is treated as a dividend, the rules of Article 12 (Dividends) will be applied.

As noted under paragraph (3) of Article 4 (Source of Income), royalties (including contingent gains) will be treated as income from sources within a Contracting State only to the extent they are payments made as consideration for the use of, or the right to use, property or rights described in paragraph (2) within that Contracting State.

This source rule is similar to the source rule in section 861(a)(4) of the Code.

This Article is subject to the saving clause of paragraph (3) of Article 6 (General Rules of Taxation). Therefore royalties derived by a citizen of the source Contracting State may be taxed by that Contracting State without regard to this Article.


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The above is intended for informative purposes only and is in no way to be construed as tax advice or a legal opinion. It is important to consult with an Israeli tax lawyer on the practical application of the Israel US tax treaty.


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