HMRC has published a response to its consultation ‘ Royalties Witholding tax’ together with draft legislation included in the Finance Bill 2019.

The Consultation set out proposals to extend the rules imposing Withholding tax (WHT)  to apply to royalty payments made by connected parties to non-UK residents for the exploitation of Intellectual Property (IP) (or certain other rights) in the UK.

The original intention was for the measure:

  • To only apply where the payee is resident in a jurisdiction with which the UK does not have a Double Tax Agreement (DTA) with a Non-discrimination article (NDA).
  • To apply regardless of whether the payer has a UK presence.

Respondents to the consultation agreed that:

  • A generic sales based approach was best.
  • Measures should only apply to connected party payments with anti-avoidance rules to prevent this being circumvented.
  • A de minimis UK sales test would be appropriate.
  • A WHT approach could result in inequitable double taxation.

Following the consultation the government has decided to move away from a WHT approach and now proposes under the newly titled ‘Offshore receipts in respect of intangible property’:

  • To directly impose a UK income tax charge on the gross income realised by a foreign resident entity or related party in respect of intangible property, or rights over that property, that is used to generate UK sales.
  • The charge will apply only to the proportion of the foreign resident entity’s intangible property income that is derived from UK sales.
  • The charge will not apply if the foreign entity is resident in a jurisdiction with which the UK has a full tax treaty, meaning a DTA which contains an NDA.
  • The charge will not apply where:
    • the tax on the income paid by the foreign entity is at least 50% of the UK income tax charge that would otherwise arise under this measure.
    • UK sales do not exceed £10 million.
    • The IP in question has not been acquired from related parties, and the business undertakes all (or substantially all) of its trading activities in the low tax jurisdiction.
  • There will be anti-forestalling provisions from 29 October 2018 and a Targeted Anti Avoidance Rule to protect against arrangements designed to avoid the charge, for instance by transferring ownership of intangible property to another group entity resident in a full treaty jurisdiction.
  • The payment obligation will attach to the non-UK resident entity directly. Entities will be required to complete and submit a SA700 “Tax return for a non-resident company liable to Income Tax”.

The measure will be included in Finance Bill 2018-19 and will come into effect from 6 April 2019. 


Consultation: Royalties Withholding tax 

Withholding tax

Budget 2018:Summary for Individuals and Businesses

External links:

Offshore receipts in respect of intangible property (previously Royalties Withholding Tax); summary of responses

HMRC Policy paper: Income tax: Offshore receipts in respect of intangible property’