Royalties taxation cap and source state treatment limited when recipient is the beneficial owner under tax treaty rules. Treaty permits both source state and residence state taxation of royalties, with a reduced source tax when the recipient is the beneficial owner. Royalties are defined broadly to cover copyrights, films, patents, trademarks, designs, secret formulas, technical information and use of equipment. Royalties are deemed to arise where the payer or the payer's permanent establishment or fixed base that incurred the liability is situated. If the beneficial owner has a permanent establishment or fixed base to which the royalty right is effectively connected, or performs independent personal services from a fixed base, the provisions on business profits or independent personal services apply. Special relationship excess payments are limited to arm's length amounts for treaty application.