INTM630450 - Royalty Withholding: UK Source: Arrangements seeking to obtain a foreign DTA advantage

FA16/S42(7) brings arrangements that seek to achieve a foreign DTA advantage within the scope of S917A. This ensures that arrangements entered into with a main purpose of obtaining a tax advantage using the DTA between two non-UK countries does not prevent the UK from retaining taxing rights on royalty payments made in connection with a UK PE.

Example

The group holding company, HCo, licences the right to use and exploit its intellectual property to another group company resident in Country B - ‘Company B’. Company B sub-licences these rights to Company A to exploit in conducting its business. The licence between HCo and Company B and the sub-licence from Company B to Company A were put in place for the purpose of ensuring that Company A did not have to withhold tax in Country A on the payment of the royalty that ultimately ends up in HCo. The UK does not have a DTA with the country in which HCo is resident.

An enquiry into the affairs of Company A has shown that it has a dependent agent permanent establishment in the UK. The royalty payment from Company B to HCo is connected to the trade carried on through the UK PE.

The royalty is being paid from Company A to Company B. As such, absent any other considerations, Company B would be entitled to the benefit of the DTA between Country B and the UK which provides for royalties to be taxable only in the state of residence of the beneficial owner. The arrangement under which the royalties were paid was put in place to obtain the benefit of the DTA between Country A and Country B. As such, ITA07/S917A would not normally apply to prevent the obligation to deduct income tax from the royalty payment from being switched-off by the DTA between Country B and the UK.

FA16/S42(7) provides that where it is reasonable to conclude that an arrangement was put in place with a main purpose of obtaining a benefit under the DTA between Country A and Country B, those arrangements will be considered for the purposes of 917A to be “DTA tax avoidance arrangements”. Therefore, in this example S917A would provide that the obligation to deduct tax from the royalty with a UK source will not be affected by the provisions of the DTA between Country B and the UK.