When Equipment Royalties Aren't Royalties: Treaty Carve-outs

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June 27, 2026·9 min read·Tax Treaty Analysis

If your business leases or rents equipment from a foreign owner — a manufacturing press from a German maker, scientific instruments from an Australian lab, IT hardware from an Indian vendor — you may be a US withholding agent on those rental payments. And one quiet feature of US income-tax treaties trips up even careful payors: the same equipment-rental payment can be a treaty "royalty" under one country's treaty and not a royalty under another's. That single distinction changes the withholding rate, the treaty article your payee claims, and which box they check on their W-8.

Start from the default. US-source payments of fixed or determinable income to a foreign person are withheld at a statutory 30% (Internal Revenue Code §§1441 and 1442). A treaty only lowers that rate where its text actually grants relief — and for equipment, whether relief exists at all depends on how the treaty defines "royalties."

The one question that decides everything

Most people assume equipment rental is obviously a "royalty" — you're paying for the use of property, which sounds royalty-like. But a tax treaty doesn't run on intuition; it runs on its own definition. The Royalties article of every US treaty contains a definition clause that lists exactly what counts. The clean textual test is this:

Equipment rental is a treaty royalty only if the Royalties article explicitly names "industrial, commercial, or scientific equipment" (or "tangible personal property") in its definition of royalties.

If the definition lists only intangibles — copyrights, patents, trademarks, secret formulas, know-how — then equipment is not a royalty under that treaty, full stop.

A common trap: many older treaties end their intangibles list with a catch-all like "or other like property or rights." It is tempting to read equipment into "other like property." Don't. Under the legal canon ejusdem generis ("of the same kind"), a general catch-all that follows a specific list is read as covering only items of the same type as the list. A list of intangibles plus "or other like property" still means intangibles only — tangible equipment is excluded. (Some treaties remove all doubt: the US–Jamaica treaty's royalty definition expressly says it "does not include payments for the use of tangible personal property.")

This produces three distinct structures, and your withholding outcome depends on which one your payee's country falls into.

Structure 1 — Excluded: equipment routes to Business Profits

In these treaties the royalty definition is intangibles-only, so equipment rental falls out of the Royalties article entirely. Where does it go? To the Business Profits article (Article 7) — the treaty's rule for ordinary business income.

That routing usually produces a great outcome for the payee: under Article 7, a foreign person's business profits are taxable by the US only if they arise through a US permanent establishment (a fixed place of business such as a US office, branch, or factory). A foreign lessor renting equipment to a US customer from abroad typically has no US permanent establishment — so the correct withholding is 0%.

But — and this is the part that costs money — the 0% only applies if the payee makes the right claim:

• The payee must claim Business Profits (Article 7) on their W-8, certify they have no US permanent establishment, and (for entities) satisfy the treaty's Limitation on Benefits (LOB) article, which screens out treaty-shopping shells.
• If the payee instead claims relief under the Royalties article, the claim is invalid — equipment isn't a royalty under that treaty — and the fallback is the statutory 30%.

So in an excluded-definition treaty the spread is 0% vs. 30%, turning entirely on whether the payee cited the correct article. A note on rate tables: IRS Publication 515, Table 1 shows "n/a" (not "0%") in the Industrial Equipment column for these countries. That "n/a" is the signal that equipment leaves the Royalties article and routes to Business Profits — it is not a 0% royalty rate.

The 16 treaties with intangibles-only (equipment-excluded) royalty definitions: Australia, Bangladesh, Barbados, Bulgaria, Egypt, Israel, Jamaica, Korea (South), Malta, Morocco, New Zealand, Philippines, Poland, Romania, Slovenia, and Ukraine.

Structure 2 — Included at a rate: equipment is a royalty

These treaties' royalty definitions expressly list "the use of, or the right to use, industrial, commercial, or scientific equipment." Here equipment rental is a royalty, and it's taxed at that treaty's royalty rate — claimed under the Royalties article on the W-8.

There is no universal equipment rate; each treaty sets its own. A sample:

• Canada — 10% (equipment stays in the Royalties article at the general 10% rate)
• China — 7% effective (a protocol applies the rate to 70% of gross)
• India — 10% (a reduced equipment sub-rate; general royalties are 15%)
• Mexico — 10%, Portugal — 10%, Thailand — 8%, Chile — 2%
• Several at 5%, including Italy, Estonia, Latvia, Lithuania, Sri Lanka, Turkey, and Venezuela

Because the equipment rate is set country-by-country, never assume a number — check the specific treaty's Royalties article for the equipment sub-rate.

Structure 3 — Included at 0%: same answer either way

A third group of treaties zero-rates royalties generally (the broad modern US treaty norm of 0% on royalties). For these, the equipment question is academic: whether equipment technically stays in the Royalties article (0% royalty) or routes to Business Profits (0% with no US permanent establishment), the output is 0% either way. Examples include France, Germany, the Netherlands, the United Kingdom, Switzerland, and Japan.

That convenience has one sharp edge worth flagging: the 0% still requires a valid treaty claim on a correctly completed W-8. A foreign payee who files no W-8 (or an invalid one) gets the statutory 30% regardless of how generous the treaty is.

Comparison at a glance

Worked example: leasing a manufacturing press

Acme Fabrication, a US manufacturer, leases an industrial press and pays $200,000 a year to the foreign owner. Acme is the withholding agent. Watch how the answer swings on the lessor's home treaty.

Case A — the lessor is in an excluded-definition country (say, Australia or Poland). Equipment rental isn't a royalty under that treaty, so it routes to Business Profits. The lessor operates entirely from abroad with no US office or branch.

• If the lessor files a W-8BEN-E claiming Business Profits (Article 7), certifies no US permanent establishment, and meets the Limitation on Benefits conditions → withholding is 0%. Acme remits $0.
• If the lessor instead claims the Royalties article (the intuitive but wrong box) → the claim is invalid and Acme must withhold the statutory 30% = $60,000.

Same payment, same lessor — a $60,000 difference driven solely by which article was claimed.

Case B — the lessor is in an included-at-a-rate country (say, Mexico). Equipment is a royalty there, taxed at the treaty's 10% rate, claimed under the Royalties article on the W-8BEN-E. Acme withholds $20,000 and remits $180,000. (Claiming Business Profits here would be the wrong article.)

The lesson isn't that one country is "better" — it's that the correct article is different in each case, and getting it wrong is what's expensive.

Why it matters: the payor is on the hook

Under US law the withholding agent — the payor — is liable for tax that should have been withheld and wasn't, plus interest and potential penalties (IRC §1461). If a foreign lessor hands you a W-8BEN-E claiming the wrong article and you honor it, the shortfall is your exposure, not just theirs. The two failure modes:

• Under-withholding. You accept a Royalties-article claim for equipment from an excluded-definition country, withhold a low rate or 0%, and the IRS later determines no valid treaty rate applied. You owe the 30% you didn't collect.
• Over-withholding. You withhold 30% on equipment from an included-at-a-rate or 0% country because the payee's W-8 was incomplete or you missed the equipment clause. The payee is over-taxed and has to chase a refund from the IRS — friction that sours commercial relationships.

Practical guardrails when an equipment-rental payment comes across your desk:

1. Find the country's treaty Royalties article and read the definition. Does it name "industrial, commercial, or scientific equipment"? If yes → Structure 2 (rate). If it's intangibles-only → Structure 1 (Business Profits) or, if the general royalty rate is 0%, Structure 3.
2. Match the W-8 claim to the structure. Excluded country → the W-8 should cite Business Profits / Article 7 with a no-permanent-establishment certification, not the Royalties article.
3. For entities, confirm Limitation on Benefits. An Article 7 (or any treaty) claim by a company is only valid if the entity qualifies under the treaty's LOB article.
4. Cross-check IRS Publication 515, Table 1. "n/a" in the Industrial Equipment column flags an excluded-definition treaty; a number is the equipment royalty rate.
5. When the definition is genuinely ambiguous, withhold conservatively (the higher rate) and get the payee to document the correct claim, or consult a qualified tax advisor before releasing payment.

Equipment leasing looks like a plain commercial transaction, and most of the time it is. But the treaty mechanics underneath it are unusually sharp: the same dollar of rent can be a 0% Business Profits payment, a 10% royalty, or a 30% statutory withholding depending on a single sentence in a treaty definition — and on whether your payee claimed the right article to match it.

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This article is for general educational purposes and is not legal or tax advice. Withholding outcomes depend on the specific facts of each payment. Consult a qualified tax professional before making withholding decisions.