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HMRC internal manual

Double Taxation Relief Manual

HM Revenue & Customs
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Non-residents: UK income: Annual payments etc: companies etc

Where FICO (International) issues an authority to a company paying interest and/or royalties not to deduct tax or to deduct tax at a reduced rate (see DT1820), Rule 6 of SI70/488 provides that for the purposes of ICTA88/S338 (4) such payments are to be treated as if tax had been deducted at the basic or lower rate, as appropriate, in accordance with ICTA88/S349 or ICTA88/S350. They are therefore to be regarded as deductible for Corporation Tax purposes if the general conditions in ICTA88/S338 are satisfied.

The interest Article in many double taxation agreements overrides the provisions of ICTA88/S209 (2) (e) (iv), which requires interest to be treated as a distribution (but see DT215 for the position after 28 November 1994). The terms of the interest Article vary from agreement to agreement but, in general, they provide that such interest is not to be treated as a distribution except where more than 50 per cent of the voting power in the non-resident company receiving the interest is controlled by United Kingdom residents. Where the agreement overrides the Section 209 (2) (e) (iv) provisions, the payments will also be regarded as deductible for Corporation Tax purposes if the general conditions in ICTA88/S338 are satisfied.

Where an application is made for exemption or partial relief from United Kingdom tax, or the title to exemption or partial relief is re-investigated (see DT1821 sixth sub-para.), FICO (International) will, in appropriate cases, make the necessary enquiries of the recipient to determine whether the appropriate Article of the double taxation agreement is overruled. He may also ask the Inspector (see DT1910).

Advise FICO (International) if, in any case for which an exemption or partial relief authority is held, it is established that the payments are distributions. Where, however, the status of the recipient has to be established before a decision can be made and there is insufficient information on the file, advise FICO (International) that the payments would fall to be treated as distributions if the relevant Article of the agreement were ignored. FICO (International) will then make the necessary enquiries.

As regards payment of interest or royalties made under `free of tax’ agreements, see DT1836 - DT1840.