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HMRC internal manual

International Manual

EU Interest and Royalties Directive: Who is affected by the Directive?

The Directive applies to:

  • companies of a Member State
  • permanent establishments in a Member State of a company of another Member State

UK permanent establishments of companies that are established in non-EU states are therefore excluded.

There is a list of current Member States at INTM367025.

Annexed to the Directive is a list of the types of companies to which the Directive may apply. This is defined both by the type of entity (listed at INTM367030) and the types of taxes to which the entity is subject (listed at INTM367035). Companies which are incorporated outside of the EU are excluded, as are those which, under the terms of any Double Taxation Treaty would be regarded as tax resident outside of the EU.

It is however, not necessary that the state in which a company is treated as tax resident, either for domestic or treaty purposes, is the same as that in which it was incorporated, so long as both are Member States. Thus a company incorporated in the UK which is effectively managed in Spain, and therefore treated for Spanish domestic tax purposes as resident there, can rely on the terms of the Directive for exemption from any withholding tax on interest or royalty payments received from an associated company (as defined for these purposes) in the UK.

The definition of qualifying taxes includes taxes which are imposed after the Directive comes into force and which are identical or substantially similar to those listed.

The claimant must be the beneficial owner of the interest or royalties. It cannot be an intermediary. In the case of a permanent establishment, the debt-claim or right must be “effectively connected” with the permanent establishment, which means that it must be income of the permanent establishment which is subject to one of the listed taxes.

The “25% associated” companies rule

The claimant and the payer must be “25% associated” companies - for the purposes of the Directive and legislation (ITTOIA05/S761, “associated” means that:

one of the companies must directly hold:

25% or more of the capital in the other, or 

25% or more of the voting rights in the other

or a third company must hold directly:

25% or more of the capital in each of them or 

25% or more of voting rights in each of them

Holdings must only involve companies resident in an EU Member State, so that the “third company” mentioned above must also be EU resident.

The definition of “associated” for the purposes of the Directive is a narrow one, clearly defined as above. This means that there are restrictions on what part of a group of companies can make a claim under the Directive. Only companies with this close relationship can qualify. The wider group will only be considered in establishing whether a “special relationship” exists between the companies (see INTM400030).