Tax Treaty Series

ITQ T-

018

October 18, 2019

Question

ACO is a company which is resident in country A. It is an accredited internet domain name registrar authorised by Internet Corporation for Assigned Names and Numbers (ICANN).

BCO is a company which is resident in country B.

BCO pays a fee to ACO to register its internet domain name.

Is the fee a royalty, as defined in Art. 12 of the A/B double tax treaty?

Please provide separate answers for: (i) assuming the A/B treaty is identical to the 2011 UN model treaty; and (ii) assuming the A/B treaty is identical to the 1996 US model treaty.

Answer

(i) A/B treaty is identical to 2011 UN model treaty:

The relevant part of the “royalties” definition in Art. 12(3) is: “…consideration for the use of, or the right to use, … any…trademark…”.
The term, “trademark”, is not defined in the treaty. It is also not defined in either the UN Commentary or the OECD Commentary on Art. 12. Therefore, it should probably take its meaning from the domestic law of the source country (B): Art. 3(2).
Under the law of most countries, an internet domain name is not a form of trademark, although it can be legally protected in a similar way to a trademark – see (ii) below.
If the B domestic law is as described in 3. above, then the fee paid to ACO will not fall within the “royalties” definition.

(ii) A/B treaty is identical to 1996 US model treaty:

The relevant part of the “royalties” definition in Art. 12(2) is: “…consideration for the use of, or the right to use,…any…trademark, …or other like property or right…”.
The terms, “trademark” and “other like property or right”, are not defined in the treaty. They are also not defined in the US Technical Explanation on Art. 12. Therefore, those terms should probably take their meaning from the domestic law of the source country (B): Art. 3(2).
Under the law of most countries, an internet domain name is not a form of trademark, although it can be legally protected in a similar way to a trademark – for example, an action for passing off (common law).
If the B domestic law is as described in c. above, then the fee paid to ACO should fall within the “other like property or right” part of the “royalties” definition – subject to one qualification.
That qualification is whether part of the fee is consideration for the use of, or the right to use, the domain name (i.e., registration of the name), and the remainder of the fee is for BCO’s related services. Payments for services do not fall within the “royalties” definition. If the total fee can be split between the 2 components, then only the first component would be “royalties”. Otherwise, the whole of the fee would probably fall within the definition of “royalties”, on the basis that the principal purpose of the contract is the registration: see the discussion of “mixed contracts” in the OECD Commentary on Art. 12.

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