Royalties taxation: source state may tax royalties but reduced withholding applies when recipient is beneficial owner. Royalties may be taxed in the recipient's residence State, but the source State may also tax royalties subject to a reduced withholding limit when the recipient is the beneficial owner. 'Royalties' covers payments for use of or rights to use copyrights, patents, trademarks, designs, models, plans, secret formulas or processes, equipment and technical information. Royalties are deemed to arise where the payer is resident or where a payer's permanent establishment or fixed base incurs the liability; if the beneficial owner's rights are effectively connected with such a permanent establishment or fixed base, business profits or independent personal services provisions apply. Special-relationship transfers are limited to arm's-length amounts.