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HMRC internal manual

International Manual

EU Interest and Royalties Directive: Overview of the Directive

The Directive is, to give it its full title:

“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”.

The Directive seeks to abolish wherever possible withholding taxes on interest and royalty payments between member states of the European Union.

For interest payments, entitlement to the benefits of the Directive cannot be assumed. If companies want to claim under the Directive, they must apply to the LBS Double Tax Treaty Team, Nottingham for exemption from withholding tax. Details of how to do so, together with a claim form, are on the HMRC website.

Companies can in practice already apply the rules in ITA07/S911 to deduct at the treaty rate on royalties, which may be nil, but not necessarily in all cases. The Directive will effectively give greater relief where there is still a residual tax rate - e.g. the Czech Republic, Cyprus, Malta, Estonia, Latvia, Lithuania, Slovakia, Slovenia, Italy, Luxembourg, Spain, Portugal and Poland. ITA07/S914 provides for the person paying the royalties to pay them without deduction if they have a reasonable belief that the recipient will be entitled to the exemption. The Directive may have application for royalties paid in other EU States where the domestic legislation does not have a similar provision.

The Directive was implemented as UK law by FA04/S97 to 106 (now ITTOIA05/S757 to 767), and came into force on 1st January 2004. A further ten countries joined the EU on 1 May 2004 and companies within these States came within the Directive on that date.

Exemption from UK tax under the terms of the Directive cannot apply to payments made before the date on which the Directive became effective.

A list of the countries concerned, together with the types of companies which may claim under the Directive, may be found at INTM367025. This list is drawn from the Annex to the Directive.

The claims procedure for establishing entitlement to exemption under the terms of the Directive mirrors procedures for claiming double taxation relief under a bilateral treaty, but there are significant differences governing the timetable and terms, as will be seen. The procedure is explained at INTM367000 onwards.

The three month time limit

The most significant difference, so far as handling claims is concerned, is that once the HMRC has received a completed, certified claim for relief from withholding tax on interest payments, it has three months within which to issue an exemption notice or formal refusal. The 3 months period starts with the receipt of the claim by HMRC, and runs continuously from that date: it cannot be paused or halted. Unless HMRC refuses the claim within the 3 months, then it is obliged to issue a confirmatory exemption notice to the UK payer under The Exemption From Tax For Certain Interest Payments Regulations. Handling of claims is dealt with at INTM400080.

Transitional arrangements for certain countries

There is a group of countries for whom transitional arrangements have been agreed by the EU. These are the Czech Republic, Greece, Latvia, Lithuania, Poland, Portugal and Slovakia and Spain, where the Directive allows for delays by those countries in applying the provisions of the Directive to payments made to residents of other EU states, as shown in the table below. An amending Directive was issued on 29t h April 2004 to achieve this. This allows for reduction over a longer period, with the withholding tax rate not to exceed 10% for the first four years and not to exceed 5% for the remainder of the transitional period. Additionally, the rate of withholding tax applied is not to exceed any lower rate provided for in a double taxation agreement between the UK and the state concerned.

Where a transitional arrangement applies, credit for the minimum foreign tax suffered on interest and royalty income will be allowed against the recipient’s corporation tax liability in the normal fashion. Officers should check that the restriction to treaty rates is applied, where relevant, since credit for foreign tax suffered should be limited to this lower rate. See the entries for Greece, Poland, Portugal and Slovakia in the table below.

State Interest Payments Royalty payments First four years Remaining period Treaty Rate (Interest) Treaty Rate (Royalties)
             
Czech Republic 6 years 10% 10% 0% 10%
Greece 8 years 8 years 10% 5% 0%* 0%*
Latvia 8 years 8 years 10% 5% 10% 10%
Lithuania 6 years 6 years 10% 5% 10% 10%
Poland 8 years 8 years 10% 5% 0%* 10%
Portugal 8 years 8 years 10% 5% 10% 5%*
Slovakia 2 years No % specified No % specified 0%* 10%
Spain - 6 years 10% 10% 12% 10%

The transitional arrangements begin to apply from the date of application of the EU Savings Directive in the countries concerned.

Exchange of Information

The UK has certain international obligations to exchange information about rulings issued by HMRC. These obligations arise out of bilateral treaties, the EU Directive on Administrative Cooperation in the field of Taxation (the DAC), and Action 5 of the OECD’s Base Erosion and Profit Shifting (BEPS) project.  Relief at source on future interest payments caught by DAC is an agreement made between a tax authority and a customer, upon which the customer can rely. This makes it a “ruling” for international taxation purposes, meaning it is very likely to be exchangeable with another jurisdiction:

  1. automatically, under BEPS Action 5;
  2. automatically, under the DAC; or
  3. spontaneously, where it would be foreseeably relevant to advise another jurisdiction.

For more information, including whether, when, and how to exchange such rulings: please consult IEIM500000+ onwards.  There may be information that you will need to collect from the customer, so it is important that you review the guidance on sharing rulings before you reply.