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HMRC internal manual

International Manual

EU Interest and Royalties Directive: Treatment of royalties under the Directive

In the case of 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 under the Directive. A similar entitlement is contained in UK domestic legislation at ITA07/S911 (see CTM35270) and provides that where the payer of a royalty has a reasonable belief that the person to whom the payment is being made is entitled to benefit from the terms of a double taxation agreement, that payment may be made together with the relevant amount of relief from UK tax.

The ‘reasonable belief’ test in sections 911 and 914 is considered further at CTM35215. The test enables the payer to pay gross even when it is not in a position to know beyond doubt the status of the recipient. The payer can therefore act on the basis of assurances given by the recipient or by an intermediary if it considers these assurances to be sufficient grounds for reasonable belief. If, before a payment of royalty, the company entitled to the income becomes aware that the conditions are no longer met, it must notify the payer and HMRC without delay.

The self-assessment aspect of ITA07/S914 can mean that for UK payers in many situations the Directive will be superfluous, although it should be noted that while a double taxation treaty might leave a residual UK right to tax (for example the reduced rate of withholding tax of 8% on royalty payments to Italy) the Directive exempts these completely. The general principles contained in the Directive may of course have application in other EU states where UK companies are being paid royalties and their domestic legislation does not have a similar provision.

The UK payer includes such payments in page CT600H of its CT Return - for which it can download the form at link - and it should therefore be prepared to defend the accuracy of its reasonable belief if challenged.


The benefit of the Directive does not apply to royalties “if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the right in respect of which the royalty is paid to take advantage of…[this legislation](ITTOIA05/765(2)).

The anti-avoidance legislation closely follows the anti treaty-shopping provisions contained in many of the interest and royalty articles of double taxation agreements. The measure will be applied in a fashion consistent with those provisions.