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The OECD Model definition is similar to that in the UN Model, except that it does not include payments for films or tapes used for radio or television broadcasting, or for the use of, or right to use, industrial, commercial or scientific equipment.

The OECD Model definition included payments for the use of, or right to use, such equipment until 1992, when the definition was amended to remove this reference. The majority of OECD countries considered that this amendment was appropriate for a number of reasons, including the fact that income from equipment leasing was usually of a different nature from royalties proper, and that taxation on a gross basis might easily result in excessive tax. Under the OECD Model, after 1992, payments for leasing of equipment would fall under Article 7. Most OECD countries that provide for taxation of royalties at source in their treaties also reserve the right to include equipment leasing; however, the rate for such taxation is often lower than that applying to other royalties, reflecting the fact that equipment leasing activities will usually have higher associated expenses, including depreciation and cost of financing, than other activities giving rise to royalties.

The OECD Commentary makes it clear that, under the current OECD Model, payments for services are not within the scope of the royalties article. The OECD Commentary draws a distinction between royalties, which fall within Article 12. and payments for services, which would fall under Article 7. For example, it distinguishes between payments for “the use of. or the right to use” designs, models or plans (royalties) and payments for the development of a design, model or plan that does not already exist (service fees to which Article 7 applies).

Nevertheless, some amounts that would be considered to be service fees rather than royalties in the view of the OECD may be treated by some countries as royalties and subject to withholding tax.


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