One of the most important characterisation issues arising from e-commerce was the distinction between business profits and the part of the treaty definition of “royalties” that deals with payments for the use of, or the right to use, a copyright. Since the definition of royalties applies to “payments for” any of the various items listed in the OECD definition, the main question to be addressed is the identification of the consideration for the payment.
Some countries have legislation under which transactions which permit the buyer to download software or other electronic content may give rise to use of copyright by the buyer. This may occur because a right to make one or more copies of the digital content is granted under the contract. Where the essential consideration is for something other than the use of, or rights to use, rights in the copyright and the use of the copyright is limited to such rights as are required to enable downloading, storage and operation on the buyer’s computer, network, etc such use of copyright should be disregarded in the analysis of the character of the payment for treaty purposes.
For example, where a payment is made by a buyer for the downloading of software, whilst the electronic downloading of the software may or may not constitute the use of a copyright by the buyer, the essential consideration for the payment is not that possible use of a copyright. The purpose of the payment is to obtain personal use or enjoyment of the product, therefore the act of copying the digital content onto a hard disc is incidental to its main use. The incidental part is not relevant for income classification purposes because it does not correspond to the essential consideration for the payment