Withholding tax

Produced by Tolley
Withholding tax

The following Corporation Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Withholding tax
  • Introduction
  • Interest
  • Source
  • Payment
  • Exemptions
  • Royalties
  • Exemptions
  • Offshore receipts of non-UK companies
  • UK permanent establishment (PE) use of intellectual property
  • More...

Introduction

UK tax must be withheld on UK payments including:

  1. interest

  2. royalties

  3. rental income

Withholding tax may be reduced under double tax treaties (DTT) or European directives, both of which may be subject to making a formal claim.

This guidance note outlines the rules for UK withholding tax, and how relief may be claimed under a DTT or European directive for UK and overseas withholding taxes.

It should be noted that UK companies may also suffer overseas withholding tax where they receive income from outside the UK. In addition to interest, royalties and rental income, withholding tax may also arise on dividends or technical fees.

Interest

Tax at the income tax basic rate (20%) must be withheld from certain UK interest which is paid to a company or individual resident outside the UK.

UK withholding tax arises if:

  1. the interest has a source in the UK

  2. it is yearly interest

  3. it is actually paid

See also Withholding tax on payments of interest and Simon’s Taxes A4.421.

Source

Following the decision in Westminster Bank v National Bank of Greece, HMRC sets out the following factors for determining the source of interest:

  1. the place in which the debt will be enforced, which will often be the residence of the debtor, but may also require a consideration of the law under which the loan agreement is drawn up

  2. the source from which interest is paid

  3. where the interest is paid

  4. the nature and location of the security for the debt

Westminster Bank Executor and Trustee Company (Channel Islands) Ltd v National Bank of Greece SA (1969) 46 TC 472

HMRC has subsequently updated its view in the SAIM9090, which further says:

  1. it considers the residence of the debtor to be the most important factor

  2. EU rules on jurisdiction may affect where the debt will be enforced

Two more recent cases have reinforced the view that the residence of the debtor is the most important factor, along with the location of the assets held by the debtor as these factors will

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