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HMRC internal manual

International Manual

EU Interest and Royalties Directive: What an interest payment exemption notice covers

An exemption notice under the EU Directive confers an exemption from tax on the arm’s length amount of interest received by a non-resident associated company of the payer.

It applies to payments made on or after 1s t January 2004.

If satisfied that the conditions are met, HM Revenue & Customs will issue an exemption notice for a specified time period (usually at least a year and no more than three years). Such a notice only applies to the arm’s length amount of interest, so where there is a special relationship between payer and recipient, taxpayers will be offered an opportunity to seek advance approval from HMRC as to the quantum or method of calculation of the arm’s length amount by way of a thin capitalisation agreement. HMRC has three months from receipt of a complete claim to decide whether to issue an exemption notice or not (see INTM400080), and there will be cases where at the expiry of the three month deadline negotiation is continuing about how much interest constitutes the arm’s length amount. This need not hold up the issue of the exemption notice, since the notice provides exemption only for the arm’s length amount and the notice is not invalidated if the means of calculating the actual amount of exempt interest is only agreed at a later date.