Payments for information concerning industrial, commercial or scientific experience (knowhow) are included within the definition of “royalties” under both the OECD Model and the UN Model. The scope of this part of the definition, and in particular whether or not it includes payments for services involving the application of such knowhow, is a difficult issue.
The OECD Commentary discusses at length the distinction between contracts for knowhow and contracts for the provision of services where one of the parties uses his knowhow and skills to execute work for the other party. Only payments under the former would be regarded as royalties; the latter, according to the OECD Commentary, would generally fall under Article 7. Paragraphs 11 to 11.6 of the OECD Commentary on Article 12 provide guidelines on criteria for distinguishing the two types of contracts. Examples of payments that, on the basis of these criteria, should be regarded as payments for services, and received as consideration for the provision of know-how, are set out in paragraph 11.4 of the Commentary. Payments for “pure technical assistance” are listed among the examples of such payments. Many countries, including jurisdictions outside the OECD, follow these guidelines.
The UN Commentary on Article 12 refers to parts of an earlier version of the OECD Commentary as being relevant, including:
“In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public. It is recognized that the grantor is not required to play any part himself in the application of the formulae granted to the licensee and that he does not guarantee the result thereof. This type of contract thus differs from contracts for the provision of services, in which one of the parties undertakes to use the customary skills of his calling to execute work himself for the other party.”