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HMRC internal manual

International Manual

Foreign tax paid on trade income: limitation on credit: Royalties

Where the royalties are not pure income profit of the UK resident recipient, because they are trading receipts (for example, a UK concern licenses foreign residents to use its patents in return for royalties) credit can nevertheless be given for the foreign tax against the UK tax charged on the profits to which the royalties give rise, that is after deduction of an appropriate amount of expenses, whether incurred in the foreign country or elsewhere, and capital allowances attributable to the royalty income (see INTM168010). Both expenses directly attributable to the earning of the income and a reasonable proportion of indirect or general expenses should be taken into account.

All foreign royalties derived from the same intangible asset are treated as a single item of foreign income with a single tax payment. Royalties originating from different assets should be considered separately for the purpose of calculating the maximum credit available for tax paid on the royalties, unless it is reasonable to suppose that further aggregation does not materially alter the outcome of the calculation of maximum credit.


A company holds patent rights that are licensed to three countries that impose withholding taxes on royalty payments of 20%, 10% and 5%. Royalties of 100 are received from each country and in each case expenses attributable to the payment are 70.

The total royalty income is 300 and foreign tax paid is 35. The total profit is 300 - 210 = 90, so UK tax at 30% is 27, which determines the amount of credit relief that may be given.

In some cases, where the foreign tax rate is low, it may not be necessary to ascertain full details of the expenses attributable to the royalties if it is apparent that the credit will not need to be limited to the Income Tax or Corporation Tax on the UK measure as determined in accordance with the previous sub-paragraph. For example, if the foreign rate is 10 per cent charged on the gross royalties and the UK rate is 33 per cent, only if the apparent expenses etc. attributable to the royalties exceed 69.6 per cent of the gross royalties will there be any restriction of credit. Inspectors should use their own judgement in deciding whether full details of the attributable expenses are required.

See INTM161110 and INTM161130 paragraph (b), in connection with determining where royalties and `know how’ payment’s arise.