The management of copyright and related rights (also known as “neighbouring rights”) is a topic of primary importance in the music industry, which relies on royalties generated by the licensing of copyrighted songs and recordings as well as on payments to the owners of the sound recording as a primary form of income for musicians. The issue, however, presents aspects that are not easy to interpret, with the consequence that often the income flows associated with such rights raise uncertainties that can influence their classification for tax purposes.
Summary: 1. General overview: copyright vs neighbouring rights – 2. Taxation of neighbouring rights: domestic law vs tax treaty law – 3. Payments of neighbouring rights to non-residents
1. General overview: copyright vs neighbouring rights
In the Italian legal system, the protection of copyright and neighbouring rights is governed by Law no. 633 of 22 April 1941, (hereinafter “Law no. 633”). It is aimed at establishing in a binding manner the conditions and limits for the protection of all the intellectual rights that creators own over their literary and artistic works – such as literature, music, figurative arts, architecture, theatre, and cinematography – irrespective of the way and type of expression, prohibiting others from using them unlawfully. Copyright belongs to the author and the author’s heirs, as far as the work is distinguishable by the simultaneous presence of originality and innovation, giving the right (perpetual, non-transferable and inalienable) over the intellectual creation (also “moral rights”) and the exclusive right to its economic exploitation, within the limits set out by Law no. 633 and for the purposes laid down therein (also “economic rights”). Specifically, moral rights are intended as the author’s rights of ownership over the work and protection of its integrity; on the other hand, economic rights represent the exclusive author’s rights to gain economic benefit from his work in any form and manner, whether original or derivative, in exchange for payment. Unlike moral rights, economic rights may be waived or assigned to third parties and are time-limited (see below). As an example, economic rights may derive from activities such as publication, reproduction of protected works, public performances and recitation in musical, dramatic, cinematographic works or any other work that may be the subject of a public show, resale, or rental to a phonogram, cinematographic or audio-visual works producer. Broadly speaking, the objective scope of Law no. 633 is related to (i) literary, dramatic, scientific, teaching and religious works; (ii) operas and musical works (with or without words), musical-dramatic works and the musical variations which represent an original work in themselves; (iii) choreographic and pantomime works; (iv) works of sculpture, painting, drawing, engraving and similar figurative arts, including scenography; (v) architectural drawings; vi) cinematographic art, silent or with sound; (vii) photographic works and those expressed with proceeding similar to the photographic if not a simple picture; (viii) computer programs; (ix) databases considered as a collection of works, data or other elements systematically independent or methodically organized and individually accessible through electronic devices or in other ways.
Law n. 633 extends the original concept of protection of copyrights to neighbouring rights, representing the rights of people other than the authors – such as (i) performing artists, (ii) producers of sound recordings and films, (iii) radio and TV broadcasters or cable program creators – to receive a kind of “compensation” for their support in the exercise of the author’s rights. Related rights can be identified as the rights of those who do not develop intellectual works (in the strictest sense) but play a role in the functioning and development of the cultural and creative industry. As an example, when a recording is broadcast on radio or tv, played in public or streamed, performers (e.g., orchestra) and record producers (e.g., artistic producers and record companies) have the right to receive remuneration for neighbouring rights for all forms of the said recording’s uses.
Regarding the period of protection, which grants the holder’s right for the exploitation, copyright lasts throughout the author’s life, followed by an additional 70 years after his death, while neighbouring rights have a shorter duration depending on the type of related rights:
- 50 years from the time of fixation for phonographic producers, producers of cinematographic and audio-visual works or of a sequence of moving images;
- 50 years from the first radio or TV broadcasting of a broadcast;
- 50 years from the time of performance;
- 25 years from the first lawful publication or the first lawful communication to the public;
- 20 years from the first lawful publication in any form or by any means for critical or scientific editions of works of public domain;
- 20 years from the making of the photograph;
- 5 years from the first performance for designs of stage sets.
The following table provides a statute reference of copyright and neighbouring rights in Law n. 633:
2. Taxation of neighbouring rights: domestic law vs. tax treaty law
The recognition of taxing rules applicable to income from related rights for domestic purposes requires a preliminary assessment of the taxation of income from the exploitation of copyrights.
The remuneration received from the disposal or license of an intellectual work protected by copyright qualifies as income from self-employment if the author carries out the activity (intellectual or creative) with the professionalism and habituality required by art. 53, par. 1 of the Presidential Decree 917/86 (Italian Income Tax Act, hereinafter “TUIR”). In such cases, the individual would be subject to IRPEF (personal income tax) calculated at progressive tax rates. For income computation, costs and expenses incurred – directly attributable to the business activity – may offset the amount of taxable income. In other cases, the remuneration received qualifies as income assimilated to self-employment (art. 53, par. 2, lit. b) of the TUIR). It means that the taxable income is reduced (according to art 54, par. 8 of the TUIR), by 40% if the author is 35 years old or younger or by 25% in other cases. Instead, where the exploitation of copyright is carried out by the author’s heirs, legatees or transferees, the remuneration qualifies as miscellaneous income (art. 67, par.1, lit. g) of the TUIR). It is important to note that if the copyright is acquired free of charge, 100% of the income is subject to taxation, when otherwise only 75% of the remuneration would be subject to tax (art. 71, par. 1 of the TUIR).
In terms of taxation of neighbouring rights, the point is, therefore, to determine whether it can be classified with the same taxing rules applicable to copyright. And the answer is negative In a nutshell, the State Attorney General (“Avvocatura Generale dello Stato”) expressed his view with Opinion no. 6592 of 25 January 1997, concluding that the tax treatment of related rights (even if referred to a case of VAT) cannot be classified following the provision applicable to income from copyright, since the specific rules governing copyrights cannot regulate other types of rights, unless otherwise explicitly provided. Moreover, the Italian Revenue Agency in Resolution no. 633 of 19 June 2007 confirmed that, in absence of a specific regulation, income from neighbouring rights shall not be subject to the same provisions applicable to income from the exploitation of copyrights. Accordingly, (i) remuneration deriving from neighbouring rights do not follow the tax treatment set out above and (ii) the taxable income cannot be reduced by the rate of 25% provided by art. 54, par. 8 of the TUIR for copyright. Consequently, any neighbouring rights income falls under the category of miscellaneous income provided by art. 67, par. 1, lit. l) of the TUIR, qualified as “obligation to allow” other persons to use or reproduce their work.
The key reference for taxation of neighbouring rights in tax treaty law can be found in art. 12 (Royalties) of the OECD Model Tax Convention (2017). Its scope is quite broad, covering payments of any kind received as consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematograph films. Art. 12 of the OECD Model gives the exclusive allocation of taxing rights to the residence state; the source state is only entitled to raise taxes if the recipient of the royalties is not the beneficial owner of the payment. However, numerous double tax treaties – such as the ones signed by Italy – deviate from the OECD Model, allocating primary taxation rights to the source state (limited to a certain amount agreed by contracting states) and secondary taxation rights to the residence state.
In consideration of the above, the application of art. 12 is not limited to income from copyright but also to neighbouring rights. In this sense, par. 8 of the OECD Commentary on art. 12 confirms that the term “royalty” relates “to rights or property constituting the different forms of literary and artistic property, the elements of intellectual property specified in the text and information concerning industrial, commercial or scientific experience. The definition applies to payments for the use of, or the entitlement to use, rights of the kind mentioned, whether or not they have been, or are required to be, registered in a public register. The definition covers both payments made under a license and compensation which a person would be obliged to pay for fraudulently copying or infringing the right”. Additionally, par. 18 of the OECD Commentary makes clear that – in case of mixed contracts signed for performances by artists or an orchestra concert given by a conductor or a recital by a musician – the fees for the musical performance, together with that paid for any simultaneous radio broadcasting thereof, should fall under art. 17 of the OECD Model. However, if the musical performance is recorded, and the artist has stipulated that they, based on their copyright in the sound recording, be paid royalties on the sale or public playing of the records, then the payment received falls under art.12. In contrast, when the copyright in a sound recording, because of either the relevant copyright law or the terms of contract, belongs to a person with whom the artist has contractually agreed to provide their services (or even to a third person), then the payments received fall under art. 7 of the OECD Model (Business profits) or art. 17 (Entertainers and sportspersons) rather than under art. 12, even if these payments derive from the sale of the recordings.
3. Payments of neighbouring rights to non-residents
In case of payments of neighbouring rights to non-residents, it is fundamental to determine whether such rights can benefit from the same tax treatment applied to copyright, enjoying the more favourable treaty rate (generally, 5% of the gross income), instead of the domestic tax rate (30% of the gross payment, art. 25, par. 4 of Presidential Decree no. 600/73). For instance, the double tax treaty between Italy and Germany expressly provides that “ (…) copyright royalties and other similar payments in respect of the production or reproduction of any literary, dramatic, musical or artistic work, including royalties in respect of cinematograph films and films or tapes for radio or television broadcasting, arising in a Contracting State and paid to a resident of the other Contracting State who is the beneficial owner of the royalties shall be taxable only in that other State”. In this case, therefore, royalty payments of neighbouring rights to German residents will be subject to final withholding tax in Italy amounting to 5% of the gross income, following par. 2 of art. 12: “royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient of the royalties is the beneficial owner thereof, the tax so charged shall not exceed 5% of the gross amount of the royalties. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation”).
However, most of the conventions of the Italian tax treaty network do not include such special provision, so that the issue of whether payments of neighbouring rights could benefit from the tax treaty rates remains. So far, there are two different approaches envisaged by Italian case law, on one side, and the tax administration, on the other. The Italian Supreme Court (see Sentence n. 21220/2006) considers that the possibility of applying the reduced tax rate to neighbouring rights is limited to cases in which the double tax conventions expressly refer to “other similar payments to copyright”. Instead, the Italian Revenue Agency’s practice is more favourable to the taxpayer, as most recently confirmed by Ruling no. 493/2020. In the case under consideration, a Swiss singer transferred to an Italian company the right to reproduce the recordings of his performance in exchange for consideration. Under domestic law, non-resident individuals are taxed in Italy according to territorial criteria laid out by art. 23 of the TUIR. In particular, art. 23 par. 2 lit. c) of the TUIR provides that “the remuneration for the use of intellectual property, patents and trademarks as well as processes, formulas and information relating to experiences acquired in the industrial, commercial or scientific fields” is deemed to be Italian sourced if the payment is made by a resident company (or the Italian permanent establishment of a non-resident entity). Consequently, the payer used to apply a final 30% withholding tax calculated on the gross payment reduced by 25% for costs and expenses (art 54, par. 8 of the TUIR).
The taxpayer was therefore enquiring the Italian Revenue Agency if, for future royalty payments, it would be allowed to apply the tax treaty rate (5%) provided by art. 12, par. 2 and 3 of the Convention between Italy and Switzerland. As a matter of fact, par. 3 of art. 12 includes only copyright among the rights covered by the treaty provision, saying that “the term “royalties” as used in this Article means payments of any kind received as consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and television and radio recordings, any patent, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience”. In this case, the Italian Revenue Agency concluded that neighbouring rights could fall within the scope of application of par. 3 of art. 12, allowing the taxpayer to apply the treaty rate for future royalty payments.
However, this conclusion places the taxpayer in a troublesome situation, since withholding agents are required to apply the treaty rates under their own responsibility (see, Resolution no. 95 of 10 June 1999). Therefore, since the conclusions reached by the tax ruling are not binding neither for the taxpayer nor for the Revenue Agency, it cannot be ignored that the broad interpretation given by Ruling n. 493/2020 could be disowned by the same tax administration and, even more, by the tax courts, excluding neighbouring rights from treaty benefits unless a specific provision is agreed by contracting States.
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