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International Manual

HM Revenue & Customs
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EU Directive: Interest & Royalties paid between Associated Companies - claims and applications by non- residents


The Directive was discussed within the EU over many years. Agreement was reached in June 2003 and the Directive entered into force on 1 January 2004.

The main intention of the Directive, as with many other EU tax measures, is to try and ensure that domestic transactions are not subject to one set of rules with different rules applying to payments that are made between Member States.

Exemption from UK tax under the terms of the Directive cannot be allowed for any payment that was made before the effective date of the Directive.

Ten additional countries joined the EU on 1 May 2004 – see INTM367025. Companies in these countries are entitled to claim exemption from UK tax under the terms of the Directive from that date.

FA2004/S97 to S106 implements “Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States”.

So far as it is possible, the UK’s claims procedure to establish entitlement to exemption under the terms of the Directive mirror procedures for claiming double taxation relief on interest and royalties.

Who is able to claim?

The companies that are claiming exemption and paying the interest or royalties must be “associated”. This means that one of the companies must directly hold at least 25% of the share capital and/or voting rights over the other (or a third company directly controls at least 25% of both the payer and recipient).

Claims can be made both by companies and by a “permanent establishment” in a Member State of a company of another Member State.

The different types of company in each Member State that are intended to qualify for exemption are specified at Article 3 of the Directive – see INTM367030. This list also appears in paragraph 3 of the guidance note that accompanies the ‘EU Interest & Royalties’ claim form – see INTM367005.

The claimant must be the beneficial owner of the interest or royalties.

This means that the person making the claim is entitled to benefit from the terms of the directive only if it receives the payments for its own benefit and not as an intermediary for some other person.

How will claims and applications be made?

Claim form ‘EU Interest & Royalties’ allows “qualifying” EU residents to establish that they are entitled to benefit from the terms of the Directive.The claim form can be downloaded from the Inland Revenue website.

The questions on the claim form are intended to allow the claimant to provide sufficient information to allow a decision to be taken about whether exemption is due.

Why is it not possible to make a claim to exemption on future payments of royalties?

FA2004/S101 provides only for the person paying royalties to pay them without deducting tax if he has a reasonable belief that the recipient will be entitled to the exemption. This provision is closely modeled on ICTA1988/S349E, which provides a similar system where full or partial relief from tax is due under a Double Taxation Treaty.

FA2004/S100 provides only an opportunity for advance approval to be obtained from the Inland Revenue for interest payments. SI2004/No2622 also provides only for a request to be made for the issue of an exemption authority for interest payments.

If UK tax is deducted from royalty payments (or from interest payments), a claim may be made on form EU Interest & Royalties (see INTM367005) for repayment of that tax.

See also INTM367040 and INTM367045

How can a permanent establishment be the “beneficial owner” of the interest or royalty?

For these purposes a permanent establishment is treated as the beneficial owner of the interest and/or royalties if

  • the debt-claim or right is “effectively connected” with the permanent establishment
  • the payment represents income that will be taxed in the hands of the permanent establishment

What does “effectively connected” mean?

  • The permanent establishment made the loan on which the interest is due as part of the business carried on by the company through that permanent establishment.
  • Royalties - are receivable by the permanent establishment as part of the business income generated through the permanent establishment.

In other words, if the permanent establishment were a separate company, the income would be regarded as the income of that company.

Are there any other conditions for relief?

To qualify for relief, the claimant (whether a company or a permanent establishment) must also be subject to one of the taxes at Article 3 of the Directive. These taxes are listed in guidance note 4 of the claim form ‘EU Interest & Royalties’. They are the equivalent of UK Corporation Tax.