EU Directive: Interest & Royalties paid between Associated Companies - claims and applications by non-residents
When the “claim” arrives here you need to check that a certificate of residence for tax purposes has been given by the tax authority of the other Member State, that a copy of the relevant contracts have been provided and that all of the questions in Part B of the claim form have been answered “appropriately”.
What does appropriately mean?
Q1 - background information to try and help us to avoid double registration of cases.
Q2 - the answer must be one (or more) of the countries of the European Union. These are listed in the guidance notes of the claim form – see also INTM367025. If any country that is not a current member of the EU is named you will have to obtain an explanation of the reasons why the company (or permanent establishment) claims to be entitled to benefit from the terms of the Directive.
Q3 - only certain legal forms of company are entitled to benefit from the terms of the Directive. These are specified in guidance note 3 – see also INTM367030. If the answer to the question is “yes”, but the stated business type is not clear, you will have to ask for clarification.
Q4 - only needs to be answered if Q3 is answered “no”. If the answer to Q4 is”yes”, no enquiries need be made. If the answer is “no”, the claimantis asked to explain why they claim to be able to benefit from the terms of the Directive. All such cases should be referred to Technical Advice Group to consider.
Q5 - only needs to be answered if Q3 is answered “no”. If the answer to the question is “yes”, no enquiries are needed. If the answer is “no”, the claimant is asked to explain why they claim to be able to benefit from the terms of the Directive. All such cases should be referred to Technical Advice Group to consider.
Q6 - the answer must be one (or more) of the taxes that are listed at guidance note 4 of the claim form – see also INTM367035. If any other answer is given you will have to ask for an explanation of the reasons why the company (or permanent establishment) claims to be entitled to benefit from the terms of the Directive. If the claimant explains that the stated tax is “substantially similar (to one of the taxes that is listed) and was imposed after 1 January 2004 no further enquiries need be made. The case should, however, be referred to Technical Advice Group to note the information.
Q7 - one of the tests that must be passed in order to qualify under the terms of the directive is that the overseas company must control at least 25% of the issued share capital and/or 25% of the voting rights of the UK company that is paying the interest or royalty. If the answer to Q7 is “yes”, no enquiries are needed.
Q8 - need only be answered if the answer to Q7 is “no”. Exemption is also available if the UK company controls at least 25% of the issued share capital and/or 25% of the voting rights of the overseas (EU) company to which it is paying the interest or royalty. If the answer to Q7 is “yes”, no enquiries are needed.
Q9 - need only be answered if the answer to both Q7 and Q8 is “no”. Exemption is also available if both the UK company which is paying the interest or royalty and the overseas (EU) company to which payment is being made are owned by a third company (also in an EU country) that controls at least 25% of the issued share capital and/or 25% of the voting rights of both companies that are parties to the transaction.
If the answer to Q9 is “yes”, the claimant is asked to provide the name and registered address of the “third” company that controls both the payer and recipient of the income. If the
- address of that company is in a member state of the EU
- and it is a business type that is listed in guidance note 3 of the claim form;
no further enquiries are needed. If the answer is “no”, or if the address provided is in a country that is not a member of the EU, further enquiries will be needed to establish why the claimant considers that it is entitled to benefit from the terms of the Directive.
Q10 - asks for information about the accounting period of the claimant. This information is required if it is necessary for us to repay any tax that has been deducted by the payer of the interest or royalty. Repayment interest might be available in accordance with ICTA88/S826.
Parts C, D and E of the EU Interest and Royalties claim form are substantially identical to our double taxation treaty claim forms.
What happens next?
If no questions arise from your examination of the information that is provided on the claim form the clock starts ticking towards the three-month deadline by which time a decision must be taken.
Because of the deadline we need to identify these cases as early as possible and, as a matter of priority, get the 4450 report request off to the relevant tax office. For the same reason we need to attach a covering memo to the 4450 telling the Inspector:
- that we are dealing with a claim/application under the terms of the Directive
- the date on which the 3 month deadline expires
- that a decision must be taken on the claim by that date
and saying that because of this deadline we want to know if there will be any delay in providing the information and we need to be kept informed of progress.
Because we need to know about progress with these cases we need to maintain a database of cases and to use this to keep a check on time limits etc. Where we are approaching the 3-month deadline you must get in touch with the tax office or CT & VAT, Specialist International as a matter of urgency to find out what is happening. An Excel spreadsheet is used to monitor the progress of these cases.
What happens when the 4450 report is received?
You need to consider the answers that are given to the questions on the report form and to make a decision about whether it is appropriate to allow exemption from UK tax. Once a decision to allow exemption is taken, you need to issue a direction (form 241(EU)) to both the claimant and to the UK payers of interest to make payment without deduction of tax. Our authority for doing so is SI2004/No2622. It is important to remember that you cannot issue a Direction where the payments are royalties.
An “exemption notice” (form 241(EU)) should be used. Any “Direction” that is issued as a result of a claim that is made under the terms of the Directive can have an expiry date of no more than 3 years.
What happens if the 4450 is not returned by the deadline?
A decision must still be taken about whether exemption from UK tax is available. If you decide that exemption is available a copy of the Direction must be issued to both the UK payer of the interest or royalty and to the overseas claimant.
The area where problems might be anticipated is where “thin capitalisation” enquiries are being made (see INTM540000). If the LBS/AreaOffice/BTG is still in negotiation about how much interest would constitute the arm’s length amount, this need not delay the issue of the notice. HM Revenue & Customs is protected in its recovery rights because the Direction cannot be applied to any more than the arm’s length amount. If an agreement about thin capitalisation is reached at a later date the original notice remains in effect, but the taxpayer has additional protection in that they know how the maximum amount of interest to which the notice applies has been calculated.