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HMRC internal manual

International Manual

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HM Revenue & Customs
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Description of double taxation agreements: Interest

Interest Articles provide that either

  • interest is only taxable in the country of residence of the beneficial owner (in some agreements it is a condition that the recipient of the interest must be subject to tax in their own country on the interest), or
  • interest arising to a resident of one country may be taxed by that country. It may also be taxed by the country in which it arises but at a rate not exceeding a specified percentage if the recipient is the beneficial owner of the interest (in some agreements it is a condition that the recipient of the interest must be subject to tax in their own country on the interest).

See INTM162090 for a note on the meaning of ‘subject to tax’.

Some early double taxation agreements do not have any interest Article, so that each country can tax interest flowing to a resident of the other country in accordance with its own domestic law. Any claim that interest in the case of such agreements falls within the terms of the industrial or commercial profits Article should be referred to Business International, Tax Treaty Team.

For chargeable periods ending on or before 31 March 2004, the legislation at Section 209(2)(da) re characterised, in certain circumstances, interest as a distribution and provides one of the UK’s defences against thin capitalisation; i.e. the reduction in the taxable profits of companies through excessive deductions of interest. The legislation applied, inter alia, where certain 75 per cent shareholding control relationships between the parties were satisfied. With effect from 1 April 2004, excessive interest on a loan between two UK companies is to be disallowed in arriving at the assessable profits or allowable losses of the borrower under the provisions of ICTA88/SCH28AA/PARA1A (now rewritten to TIOPA10/S152). Many interest Articles determine in which country the source of the interest is to be found by deeming it to arise in the country of which the payer is a resident. Special source rules may apply where the debt-claim was incurred in connection with a permanent establishment and the interest was borne by that permanent establishment.

There are provisions in the Article similar to those in the dividend Article relating to interest `effectively connected’ with a permanent establishment or fixed base (see INTM153110, seventh sub para.).

Claims under interest Articles are made to the Large Business Service Double Taxation Treaty Team, Barkley House, Nottingham who may authorise the payer to make the payments without deduction of tax or under deduction of tax at the rate specified in the Article