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Are Computer Programs Literary Works for DTT Purposes?

26 Jul 2010

In recent months we have learned of two judgments, one from the Spanish Supreme Court and another from the Spanish National Appellate Court, which re-examined the treatment of computer programs for Tax Treaty purposes, and in which both courts reached completely opposite conclusions based on the Spain-US Tax Treaty. Should computer programs be given the same tax treatment as literary Works? Taxand Spain examines the two points of view and identifies why the tax treatment of the license to use computer programs must be the same as that given to a literary work.

Within the definition of royalties included in the Tax Treaty, there are three different rates of withholding tax: 5%, applicable to payments made for the use of, or right to use, any copyrights in literary works; 8% for the use of, or right to use, films and scientific work, and for the use of industrial, commercial or scientific equipment; and 10% for all other types of royalties.

Taxpayers have argued in the past that, according to the Supreme Court's construal, given that the Spanish Intellectual Property Law protects literary, artistic or scientific works along with computer programs, the applicable withholding rate should be 5% as a literary work, since software is a predominantly practical work, a product of intellectual creativity, which uses language as a means of communication.

The entry into force on 1 January 2003, of Law 46/2002, however, brought with it an amendment to the law applicable to non-residents in that it included for the first time, on separate lines and for illustration purposes, individual references to rights in literary, artistic or scientific works, and rights in computer programs.

This amendment, which would appear to have little effect on the taxation of computer programs, was used by tax inspectors to conclude that the payments for computer programs differed from the payments for literary works, which view was recently upheld by the National Appellate Court in its judgment of 15 April 2010, to conclude that the amendment to the law was an unequivocal sign that computer programs cannot be given the same treatment as literary works and, therefore, for the purposes of the Spain-US Tax Treaty, they must be subject to withholding tax at the standard rate applicable to all other types of royalties and therefore taxed at 10%.

Despite this, on 24 March 2010, the Supreme Court handed down an interesting judgment on the same subject, which threw a new factor into the debate over the nature of these payments for Tax Treaty purposes. In this judgment, using arguments no longer based on the relationship between Tax Treaties and domestic legislation but for the first time on the commentaries to the OECD Model Tax Convention on the payments made to partially acquire copyrights, the Supreme Court held that the license to use rights in computer programs is undoubtedly a license to make commercial use of intellectual property rights, which caused it to conclude that the tax treatment of this license to use computer programs must be the same as that given to a literary work, as the court had already established on various occasions.

Taxand's Take

With this last judgment, the historical discussion on the treatment of computer programs for DTT purposes seems to be made closed; nevertheless, we will have to wait to know if this interpretation is received in the same light by the Tax Administration.

Your Taxand contacts for further queries are:
Vicente Bootello

Jos? Ignacio Ripoll

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