[Code of Federal Regulations]
[Title 26, Volume 18, Parts 500 to 599]
[Revised as of April 1, 2000]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR517.3]
[Page 117-118]
TITLE 26--INTERNAL REVENUE
CHAPTER 1--INTERNAL REVENUE SERVICE DEPARTMENT OF THE TREASURY
(Continued)
PART 517--PAKISTAN--Table of Contents
Subpart--Withholding of Tax
Sec. 517.3 Patent and copyright royalties.
(a) Exemption from United States tax--(1) In general. Any royalty
paid as consideration for the use of, or for the privilege of using, any
copyright, patent, design, secret process or formula, trademark, or
other like property, and received from sources within the United States
in a taxable year beginning on or after January 1, 1959, by a
nonresident alien individual who is resident in Pakistan for the
purposes of Pakistan tax, or by a foreign company whose business is
managed and controlled in Pakistan, is exempt from United States tax
under the provisions of Article VIII of the convention if such alien or
company has not had a permanent establishment in the United States at
any time during the taxable year in which the royalty is received.
Notwithstanding the preceding sentence, no exemption from United States
tax shall be granted under Article VIII of the convention in respect of
royalties or rentals from motion picture films.
(2) Exemption applicable to reasonable consideration only. If any
royalty exceeds a fair and reasonable consideration for the rights in
respect of which it is paid, the exemption under this paragraph shall
apply to only so much of the royalty as represents the fair and
reasonable consideration.
(3) Personal services. If a nonresident alien individual who is
resident in Pakistan for the purposes of Pakistan tax were to perform
personal services within the United States during the taxable year but
not have a permanent establishment in the United States at any time
during the year, he would be entitled to the exemption granted by
Article VIII of the convention even though under the provisions of
section 871(c) of the Internal Revenue Code of 1954 he had engaged in
trade or business within the United States during that year by reason of
his having performed personal services therein.
(b) Exemption from witholding of tax--(1) Notification by letter. To
avoid withholding of United States tax on or after January 1, 1959, from
a royalty which is exempt in accordance with paragraph (a) of this
section, the nonresident alien individual who is resident in Pakistan
for the purposes of Pakistan tax, or the foreign company whose business
is managed and controlled in Pakistan, shall notify the withholding
agent by letter in duplicate that the royalty is exempt from United
States tax under the provisions of Article VIII of the convention. The
letter of notification shall be signed by the owner of the royalty, or
by his trustee or agent, and shall show the name and address of the
obligor and the name and address of the owner of the royalty. The letter
shall contain a statement that (i) the owner is neither a citizen nor a
resident of the United States but is a resident of Pakistan for the
purposes of Pakistan tax, or, in the case of a corporation, the owner is
a foreign company whose business is managed and controlled in Pakistan,
and (ii) the owner has at no time during the current taxable year had a
permanent establishment in the United States. The letter shall also
indicate the dates on which the current taxable year of the taxpayer
begins and ends.
(2) Use of letter for release of excess tax. If the letter is also
to be used as authorization for the release, pursuant to
Sec. 517.7(a)(3), of excess tax withheld from the royalty, it shall also
contain a statement that (i) at the time when the royalty was received
from which the excess tax was withheld, the owner was neither a citizen
nor a resident of the United States but was a resident of Pakistan for
the purposes of Pakistan tax, or, in the case of a corporation, the
owner was a foreign company whose business was managed and controlled in
Pakistan, and (ii) the owner at no time during the taxable year in which
the royalty was received had a permanent establishment in the United
States. The dates of the beginning and ending of the taxable year of the
taxpayer in which the royalty was received shall also be indicated.
(3) Manner of filing letter. The letter of notification, which shall
constitute authorization for the payment of the royalty without
withholding of United States tax at source, shall be filed with the
withholding agent for each successive 3-calendar-year period during
which the royalty is paid. For this purpose, the first of such periods
shall commence with the beginning of the calendar year in which the
royalty is
[[Page 118]]
first paid on or after January 1, 1959. Each letter filed with any
withholding agent shall be filed not later than 20 days preceding the
date of the first payment within each successive period, or, if that is
not possible because of special circumstances, as soon as possible after
such first payment. Once a letter has been filed in respect of any 3-
calendar-year period, no additional letter need be filed in respect
thereto unless the Commissioner of Internal Revenue notifies the
withholding agent that an additional letter shall be filed by the
taxpayer. If, after filing a letter of notification, the taxpayer ceases
to be eligible for the exemption from United States tax granted by
Article VIII of the convention, he shall promptly notify the withholding
agent by letter in duplicate. When any change occurs in the ownership of
the royalty as recorded on the books of the payer, the exemption from
withholding of United States tax shall no longer apply unless the new
owner of record is entitled to and does properly file a letter of
notification with the withholding agent.
(4) Disposition of letter. Each letter of notification, or the
duplicate thereof, shall be forwarded immediately by the withholding
agent to the Director of International Operations, Internal Revenue
Service, Washington 25, D.C.
(5) Reasonableness of consideration. For purposes of this paragraph,
the withholding agent may, unless he has information to the contrary,
presume that the royalty represents a fair and reasonable consideration
for the rights in respect of which it is paid.