Spain ? the Netherlands: Spanish case law on classification of payments for image rights

It has been reported that the Spanish National Court (Audiencia Nacional) has decided that income from licensing image rights paid to Netherlands resident companies cannot be classified as royalty income under the tax treaty concluded between the Netherlands and Spain. The payments took place in 1999, and the Spanish tax authorities assessed withholding tax on these payments.

The definition of royalties in Article 12 of the treaty reads as follows:
3.The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.

The Court held that this definition does not include income from the exploitation of image rights, and that extending this definition is in conflict with the Spanish interpretation rules for tax treaties. Also the wording of the treaty was held to overturn the Commentaries to the OECD Model tax treaty. Hence, no withholding tax was allowed.