INTM630100 - Royalty Withholding: Background

Finance Act 2016 (FA16) introduced a number of changes to ensure that all royalties paid in connection with a trade in the UK will be subject to the deduction of income tax at source unless the UK has explicitly given up its taxing rights under an international agreement. The changes made in FA16:

• introduced anti-treaty shopping provisions relating to the requirements to deduct income tax at source from royalties,
• amended the definition of a royalty for the purposes of the rules on the deduction of income tax at source,
• specified that a royalty comes from a source in the UK if paid in connection with the trade of a permanent establishment (PE) in the UK,
• changed the Diverted Profits Tax (DPT) rules to ensure an ‘avoided PE’ is liable to DPT in the same way as a permanent establishment.

This guidance explains each of these changes in further detail.