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HMRC internal manual

International Manual

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HM Revenue & Customs
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DT applications and claims - Types of income: Royalties

Background

A royalty is paid to the originator of a work when someone other than that person uses or exploits intellectual property.

It is possible for the originator of the work to assign their rights to a work to some other person. A legally binding contract will normally be drawn up to record this change of ownership.

When a royalty is paid to someone who is outside the UK, ICTA88/S536 and S349 requires the person making the payment to deduct tax at the same time that the payment is made.

Agreements for the avoidance of double taxation have been negotiated between the UK and the governments of many other countries that provide for residents of those other countries to claim relief from UK tax. These agreements provide for relief to be allowed either at a reduced rate of UK tax or for exemption from UK tax to be allowed. The benefit of a double taxation agreement cannot be assumed; the non-resident recipient of the royalty must make a claim (but see below where, after 1 October 2002, the UK payer may make payments with the relief available under the double taxation agreement without a claim being submitted).

Royalties are defined in Article 12 of the OECD Model Double Taxation Agreement as

“The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right of use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.”

The OECD Model double taxation agreement is used when countries are negotiating a new bilateral treaty. However, the standard text is only the starting point, used to inform discussions. Both the UK and the country with which the agreement is being negotiated will often have a preferred form of words that it normally seeks to include in the text of DTAs that it enters into. For this reason the final agreed text of double taxation agreements often contain variations in their terms country by country.

Royalties that are within the charge to UK tax are defined more narrowly than the OECD definition. For the purposes of ICTA88/S536 the term “copyright” includes copyright in any literary work (including maps, charts, tables, computer programs and compilations such as encyclopedias, dictionaries etc.) any dramatic work (excluding cinematograph productions) any musical work (including music intended to be used in a “talking film” any artistic work (including works of painting, drawing, sculpture, architectural works of art, engravings etc., but excluding photographs intended to be used for cinematograph purposes) any design registered under the Registered Designs Act 1949.

For any payments of royalties that are made on or after 1 October 2002, ICTA88/S349E allows the UK payer of the royalty if he so wishes to pay royalties together with the relevant amount of double taxation relief. The payer must “reasonably believe” that the recipient of the royalty is entitled to relief from UK tax under the terms of the relevant double taxation agreement. See CT1812.