Withholding Tax Aspects of License Models

The collection of tax at source prevents foreign businesses from evading tax on revenues in the source country. This is particularly relevant for inland cases of restricted tax liability. Moreover, withholding tax at the source makes it possible to enforce legal obligations across the board. Types of revenue that are typically subject to withholding tax are investment income and royalties. Very wide variations exist worldwide for national withholding tax rates on investment income and royalties. Therefore, double taxation treaties and the EU regulatory framework seek to restrict any excessive national taxation at source. In practice, however, the initial deduction often exceeds the provisions in the double taxation treaty or EU regulations. Therefore, as a first step, it is necessary to compare the conditions of the treaties and regulations with national tax relief rules. As a second step, any remaining double taxation of royalties by both the countries of residence and source is recovered, either by exemption (exemption method) or by imputation (tax credit method). The detailed practical examples in this chapter describe this two-stage procedure and conflicts of qualification that frequently occur in practice with the interpretation of the treaties.