Taxation (International and Other Provisions) Act 2010 section 132

Interpreting provision about royalties influenced by special relationship

Section 132 explains how the royalty provisions found in double taxation agreements should be interpreted when a special relationship between the parties has inflated the amount of royalties paid above what would normally be expected.

• Where a double taxation agreement contains both royalty provisions and a special relationship rule, the treaty relief applies only to the arm's length amount of royalties — that is, the amount that would have been paid if no special relationship existed between the parties.
• When applying the special relationship rule, all relevant factors must be considered, including whether the royalty agreement would have been made at all without the relationship, and what rate or terms would have been agreed at arm's length.
• If the asset generating the royalties was previously owned by the payer, an associate of the payer, or someone who formerly carried on the payer's business (or their associates), additional factors must be examined — specifically, the amounts paid in the transactions that transferred the asset, whether those amounts were at arm's length, and whether those transactions would have occurred without the special relationship.
• The broad interpretive approach does not apply if the special relationship rule in the particular treaty expressly limits the factors to be considered to the use, right, or information for which the royalties are paid.