Guidance

Changes to deduction of tax on interest, royalties and dividends if the UK leaves the EU without a deal

Find out about the changes to tax deductions on interest, royalties and dividends if the UK leaves the EU without a deal.

Overview

If the UK leaves the EU without a deal, the way that interest, royalties and dividends are paid between UK and EU companies may change. Tax may be deducted from some payments.

Under UK domestic law and existing double taxation agreements with EU member states, you may be able to claim full or partial exemption, or claim back some or all of the tax you have paid.

Deduction of tax from interest and royalties

The EU Interest and Royalties Directive (IRD) allows EU companies to make certain interest and royalties payments to associated companies and permanent establishments within the EU without needing to deduct tax from them.

If the UK leaves the EU without a deal, from 11pm UK time on 31 October 2019, the IRD will no longer apply to the UK.

Payments from the EU

If the UK leaves the EU without a deal, some EU member states may start to deduct tax from interest and royalty payments that used to be exempt under the IRD.

The amount of tax deducted will depend on the double taxation agreement (DTA) between the UK and the EU member state.

As a UK resident company, if you receive royalties and interest in the UK from an associated company in an EU member state, you can usually apply for full or partial exemption or claim back some or all of the tax you have already paid under the relevant DTA.

Often interest and royalty payments that are exempt from domestic withholding taxes under the IRD are also exempt under the DTA. For example, payments made to the UK from France, Germany or Spain.

Sometimes the terms of the DTA state that the amount of tax deducted from interest and royalty payments cannot exceed a specific amount, but the payments are not entirely exempt. For example, payments made to the UK from Italy.

You should check the terms of the DTA between the UK and the EU country where the person paying the interest or royalties is resident. You can find information about the UK’s tax treaties here. You may need to submit a new or revised claim to the tax authorities of the EU country.

Payments from the UK

UK companies, and EU companies that have a permanent establishment in the UK, who make payments of interest and royalties to associated companies in the EU will not need to start deducting tax from these payments.

This is because sections 757 to 767 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA) allows an exemption for these payments. This legislation will continue to apply if the UK leaves the EU without a deal.

For payments of interest this exemption is not automatic. A person receiving interest payments will need to apply for the exemption by filling in an EU Interest and Royalties form.

This form can also be used to claim a repayment of tax that has been deducted from payments of interest or royalties.

If you already have an exemption, this will stay the same.

UK companies that pay royalties will still be able to make these payments without deducting tax from them if they reasonably believe that the payment is exempt under section 758 ITTOIA.

Deduction of tax from dividends

The PSD means that associated companies in different EU member states do not have to deduct tax on certain payments of dividends.

If the UK leaves the EU without a deal, from 11pm UK time on 31 October 2019, the PSD will no longer apply to the UK.

UK law does not impose an obligation to deduct tax from dividends, this will have no effect on dividends paid by UK companies to companies resident in the EU.

Some EU countries may start to deduct tax from dividends paid by EU subsidiaries to UK parent companies.

Payments from the EU

The amount of tax deducted from these dividend payments will depend on the DTA between the UK and the EU member state.

Often dividends payments that are exempt from domestic withholding taxes under the PSD are also exempt under the DTA. For example, payments made to the UK from France or Spain.

Sometimes the DTA means that the amount of tax deducted from dividend payments cannot exceed a specific amount, but the payments are not entirely exempt. For example, payments made to the UK from Germany or Italy.

This means if the UK leaves the EU without a deal, some EU member states may start to deduct tax from some dividend payments that used to be exempt under the PSD.

You should check the terms of the DTA between the UK and the EU country where the person paying the dividends is resident. You can find information about the UK’s tax treaties here. You may need to submit a new or revised claim to the tax authorities of the EU member state.

Payments from the UK

UK law does not impose an obligation to deduct tax from dividends, this will have no effect on dividends paid by UK companies to companies resident in the EU.

UK companies may continue to pay their dividends gross.

Published 20 March 2019