Chapter 8: Chapters 6 and 7: Special provision in relation to royalties
Overview
2774.This Chapter deals with two international aspects relating to the deduction of sums representing income tax from royalties paid by companies. It is based on section 349E of ICTA and section 101 of FA 2004.
2775.The first aspect concerns double tax arrangements (as defined in section 1023), whose provisions may lay down a rate other than the basic rate as the one to be applied to such payments. The Chapter provides that the paying company may deduct a sum representing income tax at the treaty rate (which in some cases is 0%) if it reasonably believes that the payee (as defined in section 913(2)) is entitled to double taxation relief on the payment.
2776.The second aspect concerns the provisions implementing the European Union Savings and Royalties Directive (Council Directive 2003/49/EC) in sections 757 to 767 of ITTOIA. These provide that a UK resident company, or a UK permanent establishment of a European Union company, may pay without deduction if it reasonably believes that the income arising from the payment will be exempt under section 758 of ITTOIA.
Section 911: Double taxation arrangements: deduction at treaty rate
2777.This section sets out the conditions under which a company may deduct sums representing income tax on the royalty payment at the treaty rate. It is based on section 349E(1), (2) and (5) of ICTA.
2778.Subsection (3) states that if, despite the reasonableness of the company’s belief, the payee is not in fact entitled to double tax relief, the right to deduct at the treaty rate is treated as never having existed.
Section 912: Power to make directions disapplying section 911
2779.This section gives power to an officer of Revenue and Customs, if not satisfied that the payee will in fact be entitled to double taxation relief on a royalty payment, to direct that section 911 is not to apply. It is based on section 349E(3) and (4) of ICTA.
2780.If an officer so directs, the paying company will then have to deduct a sum representing income tax at the basic rate as required under Chapter 6 or 7.
2781.The reference in the source legislation to “the Board” is replaced with a reference to “an officer of Revenue and Customs”. See Change 5 in Annex 1.
Section 913: Interpretation of sections 911 and 912
2782.This section gives interpretations of “royalty” and “payee” in relation to sections 911 and 912. It is based on section 349E(1) and (5) of ICTA.
2783.Subsection (1) defines “royalty” widely, including in particular any proceeds of a sale of patent rights.
Section 914: EU companies: discretion to make payment gross
2784.This section provides that, if the paying company reasonably believes that section 758 of ITTOIA (exemption for certain interest and royalty payments) applies to the payment, it may pay without deducting a sum representing income tax. It is based on section 101(1) and (2) of FA 2004.
2785.Section 758 of ITTOIA gives exemption in respect of royalty payments by UK resident companies, or by a UK permanent establishment of a European Union company, to a European Union company (see sections 757 to 767 of ITTOIA).
2786.Subsection (3) states that if, despite the reasonableness of the company’s belief, the payment is not in fact exempt under section 758 of ITTOIA, the right to pay without deduction is treated as never having existed.
Section 915: Power to make directions disapplying section 914
2787.This section gives power to an officer of Revenue and Customs, if not satisfied that payments will in fact be exempt under section 758 of ITTOIA, to direct that section 914 is not to apply. It is based on section 101(3) and (4) of FA 2004.
2788.If an officer so directs, the paying company will then have to deduct a sum representing income tax if this is required under sections 903(7) or 906.
2789.The reference in the source legislation to “the Board” is replaced with a reference to “an officer of Revenue and Customs”. See Change 5 in Annex 1.
Section 916: Duty of payee to notify if payment not exempt
2790.This section imposes a duty on the payee to notify an officer of Revenue and Customs and the paying company if it becomes aware that a condition for exemption under section 758 of ITTOIA is no longer met. It is based on section 101(5) of FA 2004.
2791.The reference in the source legislation to “the Board” is replaced with a reference to “an officer of Revenue and Customs”. See Change 5 in Annex 1.
Section 917: Supplementary
2792.This section supplements the provisions in sections 914 to 916. It is based on section 101(8) and (9) of FA of 2004.
