Payment of interest overseas: exceptions to obligation to deduct
Double taxation agreements
Most double taxation agreements entered into by the UK contain an interest article which reduces or eliminates the source country’s taxing right. The reduced or zero rates may be given by way of relief at source or by repayment of tax deducted. Neither is automatic: the recipient must apply for relief to be given at source or claim repayment.
Where the relief is given at source, authorisation will be issued to the payer, once the recipient’s application has been agreed, to operate either
- a reduced rate of withholding from payments of interest or
- a zero rate of withholding from payments of interest.
There is more information on the way in which double tax agreements may apply to reduce or eliminate withholding tax on cross-border interest in the INTM (see SAIM20000).
INTM also provides more information on the procedures for applying for relief at source, or claiming repayment of tax deducted in excess of the agreement rate.
Until clearance is given, no payer is entitled to assume that the treaty will apply so that it need not withhold tax. If interest is paid gross without clearance, then an assessment may be made on the company that failed to withhold tax to recover the lost tax and interest and, in some cases, penalties may be applicable. See SAIM9010 onwards for more information on accounting for tax deducted.