INTM630310 - Royalty Withholding: Definition of a royalty: Definitions

Background

Prior to FA16 the categories of payments for use, or the right to use, intellectual property from which there was a duty to deduct income tax at source were found in Chapters 6 and 7 Part 15 ITA 2007. S899 contained the categories of annual payments on which there was a duty to deduct income tax. S903 applied the duty to patent royalties and S906 applied to payments of the types defined in S907 when such payments were made to a non-UK resident.

The definition in S907 did not include royalties and other income related to trademarks or brand names. This meant there was no need to withhold tax on such payments if they were not annual payments. SAIM8000 contains further information on annual payments. In this context, the requirement for the payment to be ‘pure income profit’ (see SAIM8030) in the hands of the recipient meant that withholding was not required on trade mark or brand payments if the recipient had a trade of, for example, managing or protecting that intellectual property and incurred costs doing so.

FA16 aligned the UK definition of payments connected to intellectual property rights with that used in the OECD Model Convention.

Updated definition

Following FA16, S907 defines ‘intellectual property’ to include:

  • copyright of literary, artistic or scientific work,
  • any patent, trade mark, design, model, plan, or secret formula or process,
  • any information concerning industrial, commercial or scientific experience, or
  • public lending right in respect of a book

Therefore, the duty to withhold tax applies to all types of payments falling within these categories when paid to a non-UK resident.

Example

A UK company makes royalty payments for use of a trade mark to an overseas affiliate on a quarterly basis. The overseas affiliate incurs costs in protecting and developing the trade mark and as such the royalty payment does not represent ‘pure income profit’. The royalty payment in relation to the trade mark is not an annual payment and so, under the pre-FA16 rules, there was no duty to deduct income tax from the payment at source.

Following the FA16 changes to Chapter 7 ITA07, the payment of a royalty in relation to a trade mark no longer has to be an annual payment for a duty to deduct tax to arise. For payments made on or after 28 June 2016, the UK payer is required to deduct income tax at source, subject to the Double Taxation Agreement with the country in which the recipient is resident or application of the Interest and Royalties Directive. The ‘reasonable belief’ provisions at S911 and S914 ITA 2007 continue to apply – see CTM35270.