When Equipment Royalties Are Not Royalties: Treaty Carve-outs

← All articles

July 19, 2026·Updated August 2, 2026·9 min read·Tax Treaty Analysis

If your business leases equipment from a foreign owner (e.g., a manufacturing press from a German maker, scientific instruments from an Australian lab, IT hardware from an Indian vendor), the rental payments are probably subject to US withholding, and you are the withholding agent responsible for getting the rate right. The rate turns on whether the payment is a treaty "royalty," and that classification is not stable across the treaty network. The same press rental can be a royalty under one country's treaty and fall entirely outside the royalty article under another's. Everything downstream moves with the classification (i.e., the withholding rate, the treaty article your payee claims, and the box they check on their W-8).

Before any treaty enters the picture, the statute sets the default. US-source payments of fixed or determinable income to a foreign person are withheld at 30% (Internal Revenue Code §§1441 and 1442). A treaty reduces that default only where its text grants relief. For equipment, the text that matters is the treaty's definition of "royalties," and that definition is where the analysis starts.

The one question that decides everything

Equipment rental is not automatically a royalty. The treaty definition controls. The Royalties article of every US treaty defines exactly what the term covers, and equipment is a royalty only if that definition names it.

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.

Accordingly, a definition that lists only intangibles (e.g., copyrights, patents, trademarks, know-how) excludes equipment. Many older treaties end the intangibles list with a catch-all, most commonly "or other like property or rights," and it is tempting to read equipment into that phrase. The reading fails under ejusdem generis (i.e., the canon that a general catch-all following a specific list covers only items of the same kind as the list). A list of intangibles plus "or other like property" still reaches intangibles only. Some treaties remove even that doubt. For example, the US–Jamaica treaty states that the royalty definition "does not include payments for the use of tangible personal property."

Read across the network, the definitions produce three distinct structures, and your withholding outcome depends on which one covers your payee's country.

Structure 1: Excluded (equipment routes to Business Profits)

In the first group of treaties, the royalty definition includes intangibles only, so equipment rental falls outside the Royalties article altogether. However, falling outside the Royalties article does not mean falling outside the treaty entirely. In this case, the payment lands in the Business Profits article (Article 7), which governs ordinary business income. Business profits are taxable by the US only if the foreign person earns them through a US permanent establishment (i.e., a fixed place of business such as a US office, branch, or factory). For example, a foreign lessor renting out equipment from abroad typically has no such establishment, and with no permanent establishment to tax through, the correct withholding should be 0%.

Note, the 0% is not automatic. It is contingent on the payee making the right claim: Business Profits (Article 7) on the W-8, a certification of no US permanent establishment, and, for an entity, qualification under the treaty's Limitation on Benefits ("LOB") article, which screens out treaty-shopping shells. If a payee claims the incorrect article (i.e., royalty article), the claim would be invalid and fall back to the statutory 30%. The spread between the right claim and the wrong one is therefore 0% versus 30% on the same payment.

That spread is also why IRS Publication 515, Table 1 shows "n/a" rather than "0%" in the Industrial Equipment column for these countries. The "n/a" is the routing signal. It marks equipment as having left the Royalties article for Business Profits, and it should not be read as 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)

The second group answers the definition question the other way. These treaties expressly list "the use of, or the right to use, industrial, commercial, or scientific equipment," so equipment rental is a royalty, and the payee claims the Royalties article on the W-8. However, the payee cannot assume a rate. There is no universal equipment rate, and each treaty sets its own:

• 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, with general royalties at 15%)
• Mexico: 10%, Portugal: 10%, Thailand: 8%, Chile: 2%
• Several at 5%, including Italy, Estonia, Latvia, Lithuania, Sri Lanka, Turkey, and Venezuela

Because the rate is set country by country, the specific treaty's Royalties article should be checked for the equipment sub-rate before any number is assumed.

Structure 3: Included at 0% (same answer either way)

The third group makes the definition question academic. These treaties zero-rate royalties generally (i.e., the modern US treaty norm), so whether equipment stays in the Royalties article at 0% or routes to Business Profits with no US permanent establishment, the output is 0% either way. Examples include France, Germany, the Netherlands, the United Kingdom, Switzerland, and Japan.

However, academic does not mean automatic. 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, should be withheld at 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, and the answer turns on the lessor's home treaty.

Case A. The lessor is in an excluded-definition country (e.g., Australia or Poland), so the payment routes to Business Profits, and 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 should be 0% and Acme remits $0. If the lessor instead claims the incorrect article (i.e., the Royalties article, the intuitive but wrong box), the claim would be invalid and fall back to the statutory rate, and Acme must withhold 30% = $60,000. Same payment, same lessor, and a $60,000 difference driven entirely by which article was claimed.

Case B. The lessor is in an included-at-a-rate country (e.g., Mexico), so equipment is a royalty there. The payment is taxed at the treaty's 10% rate under the Royalties article on the W-8BEN-E, Acme withholds $20,000, and it remits $180,000. Note, claiming Business Profits here would be the wrong article.

The two cases carry the same lesson. The correct article is different in each, and citing the wrong one is what becomes expensive.

Why it matters: the payor is on the hook

The expense lands on you because of how the withholding rules assign liability. Under US law the withholding agent (i.e., the payor) is liable for tax that should have been withheld and was not, plus interest and potential penalties (IRC §1461). Accordingly, 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.

That exposure runs in two directions. Under-withholding is the expensive one. You accept a Royalties-article claim for equipment from an excluded-definition country and withhold a low rate or 0%, and if the IRS later determines that no valid treaty rate applied, you owe the 30% that was not collected. Over-withholding, in contrast, costs you commercially. You withhold 30% on equipment from an included-at-a-rate or 0% country because the payee's W-8 was incomplete or the equipment clause was missed, and the over-taxed payee must pursue a refund from the IRS, which strains the relationship.

When an equipment-rental payment comes across your desk, the practical sequence is:

1. Read the definition. Find the country's treaty Royalties article. If it names "industrial, commercial, or scientific equipment," the payment falls under Structure 2. If the definition is intangibles-only, the payment falls under Structure 1, or under Structure 3 if the general royalty rate is 0%.
2. Match the W-8 claim to the structure. For an excluded country, the W-8 should cite Business Profits / Article 7 with a no-permanent-establishment certification, not the Royalties article.
3. Confirm Limitation on Benefits for entities. A treaty claim by a company is valid only 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. Withhold conservatively when the definition is genuinely ambiguous. Apply the higher rate and ask 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. However, the treaty mechanics underneath are sharper than they appear. 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 article that matches it.

This article is general information for US withholding agents, not legal or tax advice. Treaty positions turn on the payee's specific facts and the current treaty text; confirm the analysis for your situation with a qualified tax advisor before relying on it.

Continue reading

Conditional Director Fees: How the US-France Treaty Allocates Board Fees

Tax Treaty Analysis · 8 min read

Six Ways US Tax Treaties Handle Director Fees

Tax Treaty Analysis · 14 min read

How US Tax Treaties Handle 'Other Income' for Foreign Persons

Tax Treaty Analysis · 10 min read

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.