EU Interest and Royalties Directive: Procedures for claims on interest payments
HMRC’s guidance on the Directive has been written to assist potential applicants - see INTM367000 onwards for guidance on claims and applications by non-residents under the Directive. These will only concern payments of interest (and repayment claims), since for royalties ITA07/S914 provides that a person paying royalties may pay them without deduction if they have a reasonable belief that the recipient will be entitled to the exemption.
Claim-handling procedures have been designed to accommodate the tight time limit on considering the merits of a claim. SI2004/2622 Reg 3(2) states that the Board (now Commissioners of Revenue & Customs) has three months from receipt of a complete and certified application for exemption on interest payments to determine whether to issue an exemption notice. The clock starts ticking once the fully-completed form is received together with “such supporting information as the source state may reasonably ask for” (Article 1(12) of the Directive). The information required in relation to UK claims is specified at SI2004/2622 Reg 4(1).
Completed claim forms are sent to the Large Business Service’s Double Tax Treaty team in Nottingham, who will determine if the information that they receive constitutes a valid claim, and (if so) the date of receipt will in turn dictate when the three month period comes to an end. Claim forms can be downloaded from the HMRC Internet site
The necessary information required in the claim form covers, in relation to the claimant non-resident company:
- proof of tax residence
- information as to the claimant’s beneficial entitlement to the income in respect of which the payment is made
- details of the tax to which the claimant is subject
- information establishing that the “25% associated” relationship condition is met (INTM400040)
- a copy of the loan agreement or other legal document providing legal justification for the payment
The claimant also confirms that:
- it is the person beneficially entitled to the income in respect of which the payment is made and that it is an EU company (but not such a company’s UK permanent establishment or non-EU permanent establishment).
- the “25% associated” rule applies (INTM400040)
- the anti-avoidance provisions in ITTOIA05/S765 do not apply
The LBS Double Tax Treaty team will ascertain that all the information asked for in the claim is provided, and that the claimant’s EU and taxable status has been certified by the other Member State. The Treaty team have their own examination and verification procedure for ensuring that all this is done, and this is outlined at INTM367020.
Details of the claim will then be sent to the relevant HMRC office, along with a note stating that the claim is under the Directive, advising when the three month deadline expires and explaining that a decision needs to be made within that timeframe. Loan and other documentation sent in with the claim will accompany the memo. As with treaty applications, claims where the amount of the loan principal or facility exceeds £50 million should be forwarded without delay to Business International, Financial Transfer Pricing Team. They should be accompanied by a copy of the consolidated accounts for the borrower for the accounting period before the loan was made.
The LBS Double Tax Treaty team have put procedures in place to make sure that Officers are fully aware when they are dealing with a Directive case and for making sure that contact is made before the deadline expires to check on progress.
The Double Tax Treaty team is committed to ensuring that the deadline will not pass without a decision being made. If the time limit simply passes without a decision being made, the paying company will be entitled to make the payments of the arm’s length amount of interest without deduction of income tax until such time as the situation is rectified by the issue of an exemption notice or formal refusal of the claim. The Directive can only give exemption to the arm’s length amount of interest.
Once the claim has been considered, the HMRC office will report back to the Double Tax Treaty team. If a decision has been made to allow exemption, a notice will then be issued to claimant and payer.
If no report is received back by the Double Tax Treaty team, they will issue a notice at the expiry of the three month deadline. In order to protect HMRC’s ability to rectify the position if it later turns out that the claim did not qualify for exemption, all exemption notices issued will specify that the exemption afforded by the Directive and enabling UK legislation can apply only to the arm’s length amount. An exemption notice will also include a sentence to the effect that any interest exceeding the arm’s length amount cannot be deducted in arriving at the assessable profits or allowable losses of the borrower and that it is subject to the provisions of ITTOIA/S765 (the anti-avoidance provision) described at INTM400030.