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HMRC internal manual

International Manual

EU Interest and Royalties Directive: Anti-avoidance measures

Anti-avoidance measures

The Directive does not preclude the application of domestic or agreement-based provisions required for the prevention of fraud or abuse. It states, at Article 5(2) that:

“Member States may, in the case of transactions for which the principle motive or one of the principle motives is tax evasion, tax avoidance or abuse, withdraw the benefits of this Directive or refuse to apply this Directive.”

ITTOIA05/S765 says that exemption under the Directive does not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the debt-claim in respect of which the interest is paid to take advantage of the provisions. A similar condition applies to royalty payments.

This measure closely follows the anti treaty-shopping provisions which are to be found in many of the interest and royalty articles of double taxation agreements. The anti-avoidance measure will be applied in a fashion consistent with those provisions. It would be strongly advisable to seek advice from CSTD Business, Assets & International  Transfer Pricing Team before action is taken to advise the overseas claimant.