Withholding tax

Produced by Tolley in association with Anne Fairpo

The following Corporation Tax guidance note Produced by Tolley in association with Anne Fairpo 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...

Withholding tax

Introduction

UK tax must be withheld on UK payments including:

  1. interest

  2. royalties

  3. rental income

UK withholding tax may be reduced under the provisions of a double tax treaty (DTT). Prior to 1 June 2021, payments of interest and royalties made to EU resident associated companies were also exempt from UK withholding tax, under the UK domestic legislation which gave effect to the EU Interest and Royalties Directive. This legislation is repealed from 1 June 2021, with no exemption from UK withholding taxes on payments to EU associated companies permitted from that date, even in cases where HMRC has previously provided clearance (known as an exemption notice) which extends beyond 1 June 2021. While the changes affect payments made on or after 1 June 2021, anti-forestalling provisions also apply from 3 March 2021 to counteract attempts to put arrangements in place between these dates.

A formal claim may be required in order to obtain the reduced rate or exemption from withholding tax, details of which are provided below. It is important that all relevant documentation is completed in advance of making any such payment.

This guidance note outlines the rules for UK withholding tax, and how relief may be claimed under a DTT or (for payments made before 1 June 2021) under the UK legislation which gave effect to the European Interest and Royalties Directive.

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. Overseas withholding taxes are briefly covered below.

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

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