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HMRC internal manual

Company Taxation Manual

HM Revenue & Customs
, see all updates

Income Tax: Deduction of tax: Royalties paid overseas

Royalties paid under double taxation arrangements in full, or after deduction at reduced rate.

FA02/S96 introduced ICTA88/S349E for payments made on or after 1 October 2002. This legislation is now in ITA07/PART15/CHAPTER8.

ITA07/S911 allows companies to pay royalties overseas and deduct only the reduced rate of tax prescribed by the relevant double taxation agreement without seeking prior clearance from the Revenue.

The conditions for the scheme are:

  • payment is made on or after 1 October 2002
  • ITA07/Part15 Chapters 6 or 7 (deduction of tax) would have applied to the royalty payment, and
  • the company reasonably believes that at the time the payment is made the beneficial owner of the payment is entitled to claim relief in respect of any double taxation arrangements.

The reasonable belief test is the same as in CTM35215. Penalty provisions have been introduced in TMA70/S98 when a payment is within the deduction at source rules in ITA07 and is made under deduction at source at the treaty rate but the payee is not entitled to treaty relief and the company which makes the payment either does not believe that the payee is entitled to such relief or could not have reasonably held such a belief.

A royalty payment under this optional scheme is defined in ITA07/S913 as:

  • consideration for the use or right to use any copyright, patent, trademark, design, process or function, or
  • any proceeds from the sale of all or any part of the patent rights.

The double taxation agreement may either allow for the payment to be made gross or with tax deducted at a reduced rate. In either case the payer applies the terms of the double taxation agreement. The overseas recipient is no longer required to make an application to the Revenue for treaty relief before receiving their income gross. If the payments are subsequently assessed to tax under ITA07/PART15/CHAPTER16 then the tax rate at which the payments are assessed is that prescribed in the double taxation agreement.

Where it is ultimately found that the recipient was not entitled to receive the payments gross or under deduction at reduced rate the Revenue retains the right to recover the IT which should have been deducted. In this event the normal provisions of ITA07/PART15/CHAPTER16 will apply.

As regards the treatment of interest, royalties etc, paid in full (or after deduction of tax at a reduced rate) under double taxation arrangements, see DT1825.