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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22615
Experience:  Taxes, Immigration, Labor Relations
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A client of mine (a Canadian Corporation) is having books published

Resolved Question:

A client of mine (a Canadian Corporation) is having books published in the US and distributed by a US corp (Balboa). The corp. will be receiving royalties only on book sales
sold worldwide. Does the corp. have to file a US tax return and if so what forms are required? Does the company have to file any tax forms with the distributor to avoid with-holding tax?
Submitted: 7 months ago.
Category: Tax
Expert:  Lev replied 7 months ago.

Lev :

Hi and welcome to our site!
A Canadian Corporation is a foreign corporation in the US and generally is taxed on income from US sources only.
There are relatively complex rules in determination of the source of income - see IRS publication 519 for references - http://www.irs.gov/pub/irs-pdf/p519.pdf
specifically - see page 12 - Table 2-1. Summary of Source Rules - as we see - in case of income from royalties for patents, copyrights, etc - the factor determining source is where property is used.
Thus - royalties for books sold in the US are from US sources - and as such are taxable in the US, but royalties for books sold outside the US are not taxable in the US.

Lev :

In additional - as you might already know - there is a tax treaty between the US and Canada - http://www.irs.gov/pub/irs-trty/canada.pdf
see page 18 - ARTICLE XII Royalties


1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that State; but if a resident of the other Contracting State is the beneficial owner of such royalties, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties.
3. Notwithstanding the provisions of paragraph 2, copyright royalties and other like payments in respect of the production or reproduction of any literary, dramatic, musical or artistic work (but. not including royalties in respect of motion picture films and works on film or videotape for use in connection with television) arising in a Contracting State and beneficially owned by a resident of the other Contracting State shall he taxable only in that other State.


So far according to the tax treaty - article XII paragraph 3 - royalties for books sold in the US are not subject of US taxes for the Canadian corporation.

Lev :

Because these royalties are not taxable in the US - the payee may claim an exclusion from withholding.
Generally, you do this by filing Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding with the withholding agent.
If income taxes will not be withhold - and assuming that the Canadian Corporation would not have any income from US sources - there is no need to file the US tax return.

Customer:

Does this mean that royalties for books sold outside of the US would be taxable an a US return would have to be filed?

Lev :

As I mentioned above - royalties for books sold outside the US are not from US sources - and as such are NOT taxable in the US for a foreign corporation.

Customer:

okay thank you for the information. This helps a lot.

Lev :

I am glad to be helpful.
Please pay be aware that there are two issues - (1) general rules for the taxation of a foreign corporation and (2) special rules based on the tax treaty with a specific country - Canada in this case.

Customer:

One more thing- If the distributor (Balboa USA) sells books to non US customers(ie Europe, etc) is there tax involved, does this change the filing of a US tax return

Lev :

As long as distributions to US costumers and to customers outside the US are accounted separately - there is NO US taxation issues.
There might be tax related circumstances in these countries - but not in the US.

Customer:

Okay thanks. Have a nice day.

Lev :

Please take a moment to rate my answer - so I would be credited for my work.
You may come later to this page for reference - or to ask additional questions.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22615
Experience: Taxes, Immigration, Labor Relations
Lev and 10 other Tax Specialists are ready to help you

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