INTM630550 - Royalty Withholding: UK Source: Interaction with Diverted Profits Tax: Relief under Double Taxation Agreements

FA15/S100(4D) provides a further relaxation of the general rule at FA15/S100(2A). This rule provides that credit is allowed against a company’s liability to DPT to the extent that a royalty payment included in the DPT liability under FA15/S88(5)(b) is:

• paid to a country or territory outside the UK,
• would not have been liable to UK income tax under a double taxation agreement or by virtue of ITTOIA05/S758 (see INTM367040) had the notional permanent establishment been an actual permanent establishment.

The effect of this rule is to remove from the scope of DPT any payments that would not ordinarily result in a UK liability.

However, this is subject to FA16/S42(7). If the arrangements were put in place to secure a tax advantage by virtue of a foreign double taxation agreement and that advantage is contrary to the purpose of that DTA, then the arrangements are DTA tax avoidance arrangements for the purpose of ITTOIA05/S917A (see INTM630200). The effect of this rule is to deny benefits under the UK DTA with the country to which the royalty payment is made. Where such a royalty payment is within the charge to DPT then no credit is given under FA15/S100(4D). This is illustrated in INTM630560.