INTM400010 - Interest and Royalty payments - overview

The EU Interest and Royalties Directive applied to payments of interest and royalties between the UK and EU until 31 December 2020. Wherever possible, the Directive removed withholding taxes on interest and royalty payments between member states of the European Union.

The Directive was implemented as UK law by FA04/S97 to 106 (now ITTOIA05/S757 to 767), and came into force on 1st January 2004. A further ten countries joined the EU on 1 May 2004 and companies within these States came within the Directive on that date.

Although, for the UK, the Directive itself did not apply to payments of interest and royalties paid on or after 1 January 2021, the domestic legislation remained in force and its provisions still applied to payments of interest and royalties paid from the UK to EU Member States before 1 June 2021. However, the domestic legislation has now been withdrawn and does not apply to any payments of interest and royalties made on or after 1 June 2021. From that date the level of withholding taxes payable on interest and royalties paid from the UK to EU member states will depend solely on the terms of the bilateral double taxation agreement between the UK and the individual member state to which the payment is made.

For interest payments, entitlement to the benefits of ITTOIA05/S758 cannot be assumed. If companies want to make a claim under ITTOIA05/S758, they must apply to the LBS Double Tax Treaty Team, Nottingham for exemption from withholding tax. Details of how to do so, together with a claim form, are on the GOV.UK website.

Companies can in practice already apply the rules in ITA07/S911 to deduct at the treaty rate on royalties, which may be nil, but not necessarily in all cases. ITTOIA05/S758 will effectively give greater relief where there is still a residual tax rate - e.g. the Czech Republic, Cyprus, Malta, Estonia, Latvia, Lithuania, Slovakia, Slovenia, Italy, Luxembourg, Spain, Portugal and Poland. ITA07/S914 provides for the person paying the royalties to pay them without deduction if they have a reasonable belief that the recipient will be entitled to the exemption. ITTOIA05/S758 may have application for royalties paid in other EU States where the domestic legislation does not have a similar provision.

A list of the countries and types of company which may claim under ITTOIA05/S758 can be found at INTM367025.

The claims procedure for establishing entitlement to exemption mirrors procedures for claiming double taxation relief under a bilateral treaty, but there are significant differences governing the timetable and terms, as will be seen. The procedure is explained at INTM367000 onwards.

The three month time limit

The most significant difference, so far as handling claims is concerned, is that once the HMRC has received a completed, certified claim for relief from withholding tax on interest payments, it has three months within which to issue an exemption notice or formal refusal. The 3 months period starts with the receipt of the claim by HMRC, and runs continuously from that date: it cannot be paused or halted. Unless HMRC refuses the claim within the 3 months, then it is obliged to issue a confirmatory exemption notice to the UK payer under The Exemption From Tax For Certain Interest Payments Regulations. Handling of claims is dealt with at INTM400080.