EU Directive: Interest & Royalties paid between Associated Companies - claims and applications by non-residents
This can be found at FA2004/S97 to S106
S97 – Introductory
This section implements the EU Interest and Royalties Directive (Council Directive 2003/49/EC of 3rd June 2003 – ‘the Directive’) into UK law, explains what is meant.
S98 – Exemption from income tax for certain interest and royalty payments
This section sets out the various conditions that must be fulfilled in order for exemption to apply. The beneficial owner of the interest or royalty payments must be a company of another Member State of the European Union, or a permanent establishment in a Member State of such a company. In addition, four specified conditions must be met.
Condition 1 (FA2004/S98(2)) requires that the payment is one that arises in the UK - as determined in Article 1.2 of the Directive. This means that the payer of the interest or royalty must be a UK company or a permanent establishment in the UK of an EU company.
Condition 2 (FA2004/S98(3)) ensures that the person beneficially entitled to the interest or royalties must be an EU company (or permanent establishment of such a company).
Condition 3 (FA2004/S98(4)) limits the type of associated companies that are entitled to benefit from the Directive. In order to qualify doe exemption the company (condition 1) paying the interest or royalty and the company (condition 2) to which payment is being made must be ‘associates’. This means that one company must directly hold 25% or more of the capital and/or voting rights in the other or that a third company directly holds 25% or more of the capital and/or voting rights in each of them.
Condition 4 (FA2004/S98(5)) applies only to payments of interest. Exemption from UK tax is only available in the case of interest payments if a claim has been accepted by the Board of HM Revenue & Customs (in practice CAR Residency) and an exemption notice has been issued to the payer in accordance with FA2004/S100 – see also INTM367045
The procedures for obtaining an exemption notice are set out in Regulations(SI2004/No2622) and largely mirror the existing procedures for obtaining benefits due under Double Taxation Treaties for similar payments of interest. See also INTM367020
S99 – Permanent Establishments and “25% associates”
This section sets out some of the requirements of Conditions 1 to 3.
FA2004/S99(2) ensures that where a permanent establishment makes a payment of interest or royalties, it will only qualify for exemption if the payment is directly connected with the business carried on by the permanent establishment. It implements Article 1.3 of the Directive.
FA2004/S99(3) determines when a permanent establishment is treated as the beneficial owner of the interest or royalties. The recipient must be taxable on the payment in the State where it is situated. It implements Article 1.5 of the Directive.
FA2004/S99(4) addresses the question of when companies are treated as ‘associated’ for the purposes of implementing the Directive. This means that one company must directly hold 25% or more of the capital and/or voting rights in the other or that a third company directly holds 25% or more of the capital and/or voting rights in each of them. This provision implements Article 3(b) of the Directive
S100 – Interest Payments: Exemption Notices
This section implements Article 1.11 to 1.14 of the Directive. And sets out the measures that are required before the UK allows exemption. It applies only to interest payments, and not to royalties. This largely mirrors the present treatment of cross-border interest payments where some measure of relief from UK taxation is afforded to the recipient under a Double Taxation Treaty.
FA2004/S100 authorizes the Board to make regulations detailing the procedures governing the issue of exemption notices and provides specific authority for what those regulations can cover.
- who should apply for a notice,
- what the application must contain,
- who will receive copies of the exemption notice,
- matters that can be specified in an exemption notice, detailing the interest to which it applies,
- setting a time limit for the issue of a notice that will apply from the receipt of all necessary details,
- when parties are required to notify changes that will affect the validity of an exemption notice after its issue,
- conditions for the cancellation or lapse of notices once issued,
- authorizing the recovery of tax in appropriate circumstances where it is found the exemption does not apply after the issue of an exemption notice.
S101 – Payment of royalties without deduction at source
Subsection 1 provides a mechanism whereby a person paying royalties that are covered by the exemption in Section 2(1) can pay them without deducting tax if he has a reasonable belief that the recipient will be entitled to the exemption. No advance approval needs to be obtained from HM Revenue & Customs It 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.
Subsection 2 ensures that where the payer’s reasonable belief turns out to be mistaken, then HM Revenue & Customs can recover the tax that should have been deducted.
Subsections 3 and 4 allow HM Revenue & Customs to direct a payer of royalties to deduct tax where they are not satisfied that the recipient is entitled to exemption under the Directive. Such a direction can be varied or revoked at a later date if new facts emerge.
Subsection 5 places a duty on the recipient of royalty payments to notify the Board and the payer of any changes affecting its entitlement to the exemption.
Subsection 6 enables HM Revenue & Customs to request information in a corporation tax return about the royalty payments made by a company where it has adopted the procedures set out in this section.
Subsection 7 applies a maximum penalty of £3000 to errors in information provided in a corporation tax return about royalty payments where the Directive has been relied upon to provide exemption from tax.
S102 – Claim for tax deducted at source from exempt interest or royalty payments
Where a person entitled to exemption from tax on interest or royalty payments receives them under deduction of tax, he can claim repayment of the tax deducted.
Any such claim must show that the conditions 1 to 3 (see above) are fulfilled.
S103 – Special Relationships
Subsection 1 implements Article 4.2 of the Directive, which makes it clear that the Directive only applies to exempt interest or royalties from tax to the extent that they would have been paid between independent parties acting at arm’s length.
Subsections 2 and 3 ensure that the special relationships rule is construed in the same way as similar rules in double taxation treaties.
Subsection 4 ensures that where a claim to relief under a double taxation treaty would provide greater relief from tax than is available under the terms of the Directive, a company can still choose to claim relief under the treaty.
S104 – Anti-avoidance
This section provides that exemption from UK tax will not be available where the main purpose (or one of the main purposes) of any person concerned with the creation or assignment of the arrangements under the terms of which the interest or royalties are paid is to take advantage of this legislation.
S105 – Consequential amendments
Subsections 1 to 3 apply penalty provisions where a company makes a payment of royalties without deducting tax, purporting to do so in accordance with FA2004/S101, but did not, or could not reasonably have believed that the exemption provided by the Directive was in fact due.
Subsections 4 and 5 provide signposts to this legislation elsewhere in ICTA1988.
S106 – Transitional Provision
This section ensures that the benefits available under the Directive can be enjoyed from 1 January 2004, even though the relevant legislation did not become law until after the passing of the Finance Act 2004, and, where appropriate, the coming into force of SI2004/No2622.