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HMRC internal manual

Double Taxation Relief Manual

Non-residents: UK income: Returns and reports: Enquiries by FICO - special relationship

Under most agreements if, by reason of a special relationship between the payer of the royalties and the recipient or beneficial owner, or between them and some other person, the amount of the royalties paid exceeds, for whatever reason, the amount which would have been agreed upon in the absence of the special relationship, relief from United Kingdom tax is available only in respect of the last mentioned amount.

In applying that provision we need to consider

a) whether the transactions which give rise to the royalty payments would have taken place in the absence of the special relationship
b) whether the rate at which the royalty is paid exceeds that which would have been agreed upon in the absence of the special relationship.
The phrase `special relationship’ encompasses a wider range of relationships than those identified by `connected persons’ legislation in United Kingdom domestic law.

A special relationship exists not only where the parties are associated (parent and subsidiary companies or companies under common control), but also where there is any community of interests as distinct from the legal relationship giving rise to the payment of the royalty. This is discussed in the Commentary on paragraph 4 of Article 12 of the OECD Model Tax Convention on Income and on Capital (DT153 and DT21500 - DT21503). It is this wider concept of a `special relationship’ that has to be applied when considering a claim under an agreement.