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While the term “services” is usually not defined, it is often necessary to distinguish services income from royalties for the purposes of determining the tax treatment that applies to that income (e.g. whether the income is subject to withholding tax) or for transfer pricing purposes. Again, countries differ in their classification of income for these purposes.

In most countries, the concept of royalties for tax purposes does not include income from sendees. But this is not always the case. What is encompassed by the concept of “royalties” for tax purposes differs between jurisdictions. It is outside the scope of this topic to examine such differences in any detail. However, a number of branch reporters discuss the extent, if any, to which income from the provision of services may be covered by the tax concept of royalties in their jurisdiction.

Many countries include, for example, consideration for leasing of industrial, commercial or scientific equipment in their definition of “royalties”. Such income could well be regarded as income from the provision of services. The supply of knowhow, which is commonly included in royalty definitions, could also be considered within a broad understanding of the scope of services.

Other activities that are clearly services are sometimes included within the definition of royalties. Some jurisdictions characterise as royalties certain payments for services that involve the application of knowhow or other specialised knowledge, or treat fees for technical services as royalties.

Payments for the use of software are sometimes characterised as royalties, e.g. in the Czech Republic. Mexico, Peru, Portugal and Spain. In Chile, while there is no statutory definition of “royalties”, specific tax treatment applies to amounts that would generally be recognised as such (e.g. payments for the use, enjoyment or exploitation of intellectual property). The Chilean tax authorities state that this treatment also applies to payments for the use. possession or exploitation of software. However, with respect to a number of payments relating to software transactions, uncertainty remains as to whether the payment would be classified as royalties or for services.

Some countries specifically extend the definition of “royalties” to certain services. In Australia, India, New Zealand and South Africa, for example, an extended definition of “royalties” in the domestic law includes assistance which is subsidiary and ancillary to the granting of rights to use intellectual property, leasing of equipment or supply of knowhow.


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