Foreign television broadcast in US – is royalty paid to foreign corporation taxable?

French open is around the corner! Some French tennis broadcasting channels will broadcast the matches live via satellites in US. Ever imagined how the tax law would apply to the royalty income paid by US companies to foreign channels?

Interesting issue recently arose when a US subsidiary sought a Private Letter Ruling from IRS to clarify whether the royalty paid by US subsidiary to its foreign parent was subject to any tax withholding.

Facts of the case were, foreign broadcasting company created a subsidiary in US to distribute to US distributors that showed foreign television channels. US subsidiary would collect fee from US distributors and pay royalties to its foreign parent. Income tax treaty between US and the country where the foreign parent was resident of had a tax treaty and a provision for taxing royalty income. However, the royalty article in the US- and foreign country income tax treaty exempts all royalties from US income tax, except royalties or rentals from motion picture films.

IRS ruling favored the Taxpayer.  IRS treated the royalties paid by US subsidiary to Taxpayer (foreign parent) as royalties that are exempt from U.S. income under the royalties article of the income tax treaty between both countries.

It would be interesting to see if the royalties article will include royalties from television broadcasting when the treaty is up for negotiation again!

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