Income Tax (Trading and Other Income) Act 2005

Interest and royalty payments

757 Interest and royalty payments: introduction

(1) Sections 758 to 767 make provision for an exemption from income tax in respect of certain interest and royalty payments.

(2) They give effect to Council Directive 2003/49/EC of 3rd June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different member States (“the Directive”).

(3) Specifically—

(a) section 758 sets out the conditions to be met for the exemption to apply,

(b) sections 759 to 761 explain certain terms used in those conditions,

(c) section 762 confers powers on the Board to make regulations about exemption notices,

(d) sections 763 and 764 make provision for limiting the exemption in the case of certain special relationships,

(e) section 765 contains anti-avoidance provisions,

(f) section 766 contains interpretation provisions, and

(g) section 767 confers power on the Treasury to amend references in sections 757 to 766 to the Directive.

758 Exemption for certain interest and royalty payments

(1) No liability to income tax arises in respect of a payment of interest or a payment of a royalty if, at the time the payment is made, conditions A to D are met.

(2) Condition A is that the person making the payment is—

(a) a UK company, but not such a company’s permanent establishment in a territory other than the United Kingdom, or

(b) a UK permanent establishment of an EU company.

See section 759 as to when a permanent establishment is to be treated as the person making the payment.

(3) Condition B is that the person beneficially entitled to the income in respect of which the payment is made is an EU company, but not such a company’s UK permanent establishment or non-EU permanent establishment.

See section 760 as to when a permanent establishment is to be treated as the person beneficially entitled to the income in respect of which the payment is made.

(4) Condition C is that the company in condition A and the company in condition B are 25% associates (see section 761).

(5) Condition D is that, if the payment is a payment of interest, the Board of Inland Revenue has issued an exemption notice in accordance with regulations under section 762.

(6) This section is subject to—

• sections 763 and 764 (special relationships), and

• section 765 (anti-avoidance).

759 The person making the payment

(1) This section supplements condition A in section 758.

(2) It applies in a case where a company is resident in one territory and has a permanent establishment in another territory.

(3) The permanent establishment (and not the company) is to be treated as the person making the payment so far as (within the meaning of Article 1(3) of the Directive) the payment represents a tax-deductible expense for the permanent establishment in the territory in which it is situated.

760 The person beneficially entitled to the payment

(1) This section supplements condition B in section 758.

(2) It applies in a case where an EU company has a UK permanent establishment or a non-EU permanent establishment.

(3) The permanent establishment (and not the company) is to be treated as the person beneficially entitled to the income in respect of which the payment is made so far as subsections (4) and (5) apply to the payment.

(4) This subsection applies to the payment if (within the meaning of Article 1(5) of the Directive) it arises in respect of a debt-claim, right or use of information which is effectively connected with the permanent establishment.

(5) This subsection applies to the payment if (within the meaning of Article 1(5) of the Directive) it represents income in respect of which the permanent establishment is subject in the territory in which it is situated to United Kingdom corporation tax or a tax corresponding to that tax.

761 Meaning of “25% associates”

For the purposes of condition C in section 758, two companies are 25% associates if—

(a) one holds directly—

(i) 25% or more of the capital in the other, or

(ii) 25% or more of the voting rights in the other, or

(b) a third company holds directly—

(i) 25% or more of the capital in each of them, or

(ii) 25% or more of the voting rights in each of them.

762 Interest payments: exemption notices

(1) The Board of Inland Revenue may make regulations about exemption notices under section 758(5).

(2) The regulations may in particular make provision for or in connection with—

(a) enabling an exemption notice to be issued only on the request of a person of a prescribed description,

(b) requiring a person requesting the issue of an exemption notice to certify that conditions A to C in section 758 are met and that section 765 (anti-avoidance) does not apply,

(c) the information to be provided in the certificate,

(d) the person to whom an exemption notice is to be given,

(e) in a case where section 763 (special relationships) applies or may apply to a payment of interest, requiring an exemption notice to specify—

(i) the amount of the payment in relation to which the notice has effect, or

(ii) the method to be used for determining that amount,

(f) imposing a time limit for the issue of an exemption notice,

(g) imposing notification requirements,

(h) the cancellation of exemption notices by the Board,

(i) prescribing circumstances in which exemption notices are to become ineffective,

(j) the making of appeals (for example, against a refusal to grant, or the cancellation of, an exemption notice),

(k) authorising, in cases where—

(i) an exemption notice has been issued,

(ii) tax has not been deducted from a payment of interest, and

(iii) any of the conditions in section 758 were not met in the case of the payment,

the recovery of that tax by assessment or by deduction from subsequent payments.

763 Special relationships

(1) This section applies if—

(a) apart from this section, section 758 would apply in relation to a payment of interest or of a royalty,

(b) at the time the payment is made there is a special relationship (within the meaning of Article 4(2) of the Directive)—

(i) between the company in condition A of section 758 and the company in condition B of that section, or

(ii) between one of those companies and another person, and

(c) owing to the special relationship, the amount of the payment exceeds the amount which would have been paid in the absence of the relationship (“the arm’s length amount”).

(2) Sections 757 to 767, apart from this section and section 764, have effect in relation to only so much of the payment as does not exceed the arm’s length amount (which may be nil).

(3) Nothing in this section or section 764 affects any relief which may be allowed under any arrangements having effect under section 788 of ICTA (double taxation relief by agreement with other territories).

764 Application of ICTA provisions about special relationships

(1) The provisions in ICTA mentioned in subsections (2) and (3) apply in relation to section 763 as if that section were a special relationship provision within the meaning of those provisions.

(2) In the case of a payment of interest, those provisions are subsections (2) to (4) of section 808A of ICTA (interest: special relationship).

(3) In the case of a payment of a royalty, those provisions are subsections (2) to (7) and (9) of section 808B of ICTA (royalties: special relationship).

(4) In those provisions as applied in relation to section 763, expressions also used in sections 757 to 767 have the same meaning as in those sections.

765 Anti-avoidance

(1) Section 758 does not apply in relation to a payment of interest if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the debt-claim in respect of which the interest is paid to take advantage of that section by means of that creation or assignment.

(2) Section 758 does not apply in relation to a payment of a royalty if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the right in respect of which the royalty is paid to take advantage of that section by means of that creation or assignment.

766 Interest and royalty payments: interpretation

In sections 757 to 767—

• “company” has the same meaning as the expression “company of a member State” has for the purposes of the Directive (see Article 3(a) of the Directive),

• “debt-claim” has the same meaning as in the Directive,

• “the Directive” has the meaning given by section 757(2),

• “EU company” means a company resident in a member State other than the United Kingdom,

• “interest” and “royalties” have the meaning given by Article 2 of the Directive,

• “non-EU permanent establishment” means a permanent establishment in a territory other than a member State,

• “UK company” means a company resident in the United Kingdom, and

• “UK permanent establishment” means a permanent establishment in the United Kingdom.

767 Power to amend references to the Directive by order

(1) The Treasury may by order make such provision amending any reference in sections 757 to 766 to, or to a provision of,—

(a) the Directive, or

(b) any instrument referred to in those sections by virtue of an order made under this section,

as appears to them appropriate for the purpose of giving effect to any Council Directive adopted after 8th April 2004 amending or replacing the Directive.

(2) This includes a power to make provision amending any such reference as it applies to section 101 of FA 2004 (payment of royalties without deduction of tax) as a result of subsection (9) of that section.