International payments of royalties and interest from 1 June 2021

Tax Manager Ibrahim Karin considers the position of international payments of royalties and interest following the expiration of the Brexit transition clauses.

Whilst the recent Autumn Budget focussed on business-friendly, cash flow improving enhancements for industry, the transitional provisions intended to smooth the UK’s departure from the EU have ended and this could pose some unexpected cashflow difficulties for businesses that operate internationally.

Foremost amongst these is potential Withholding Tax issues.

Withholding tax is where companies are required to withhold 20% tax on payments of interest or royalties to non-corporate entities of any description, or companies based outside of the UK.

The position of payments to non-corporates has not changed, but for manufacturing companies paying or receiving royalties on brand/product licences, or interest on a loan from or to a European associate, consideration should be given to the changes since the UK left the EU.

European Interest & Royalties Directive

Whilst the UK was part of the EU, the European Interest & Royalties Directive (EIRD) provided a simplified mechanism for these transactions. Companies were able to pay royalties free from Withholding tax (provided there was a reasonable expectation that the directive would apply) to EU associates and interest free from Withholding Tax following a short clearance application to HMRC.

The inverse was also true, where UK companies received royalties or interest from EU subsidiaries, there was often a simplified procedure in the European country to pay these amounts free from Withholding Tax. Further, there was also a simplified clearance procedure to pay and receive interest from EU associates.

1 June 2021 changes

However, as this has now been revoked, companies will not be able to rely on the EIRD, nor its UK equivalent legislation to pay amounts free from Withholding Tax, following a brief grace period that lasted until 1 June 2021.

Without the EIRD, UK companies are required to consider the individual double tax treaty with each EU country and potentially withhold tax at a rate of 20% on any such payments following 1 June.

European associates will also have the same issue paying Interest and Royalties to the UK, although the rate withheld and the date of change will be subject to local legislation. 

Clearances previously received from HMRC have also been revoked from 1 June, if received under the old directive.

This could significantly affect business cashflow, as although a mechanism is available in the UK (and EU associates) to relieve this tax withheld against Corporate Tax, this will not be available until the date tax is payable (up to several months post year-end).

Additionally, if the company is loss-making, receiving relief for these amounts will be significantly more complex, or only partially deductible.

Review your processes

As such, if your business is affected by the changes, it is of high importance that it reviews the changes and plans appropriately. Potentially irrecoverable tax could significantly dent business cashflow during difficult trading conditions.

There may also be additional quarterly CT61 return requirements, which can attract penalties for late, incorrect, or non-submission.

All is not lost however, as the UK has an extensive network of Double Taxation Treaties which can now be relied upon to allow companies to pay and receive interest and royalties at a nil, or significantly reduced rate of Withholding tax.

The inverse is also true for UK companies receiving interest and royalties from EU associates.

In order to gain treaty clearance from HMRC and the appropriate European Tax Authority, the appropriate evidence must be gathered and signed off by both HMRC and the European Tax authority, so pro-active planning is required.

This can take some months and it is very important that you speak to your advisor as soon as possible in order to begin the process.

Speak to us

Here at Bishop Fleming, we have a number of individuals who can assist your business with this clearance process, so if you are in any doubt, please contact your advisor for a quick chat and we can discuss the next steps to take.