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Changes to Withholding Taxes, Interest & Royalties

After leaving the EU, the UK has lost the benefit of being a part of the EU Interest and Royalties Directive, where withholding taxes were removed on interest and royalty payments between EU member states.

Companies resident in EU member states who receive interest and royalty payments from the UK may no longer benefit from withholding tax exemptions. The UK's ability to withhold tax on cross-border payments of annual interest and royalties will now be solely governed by the terms of the respective Double Tax Treaty between the UK and the relevant member state. 

How will this change affect UK companies making relevant payments?

UK domestic law requires a UK payer to withhold income tax of 20% on the payment of interest and royalties to non-residents. There is no withholding tax requirement for dividend payments.

Interest: A UK resident payer of interest needs to consider whether the domestic rate can be reduced or eliminated under the Double Tax Treaty between the UK and the recipient’s territory of residence. Where a reduction is available, the UK payer will need to apply for and seek direction from HM Revenue & Customs (HMRC) to pay the reduced rate before any payment is made.  

Royalties: The UK resident payer will need to refer to the relevant Double Tax Treaty and if a reduction or elimination of the domestic rate is available the payer may make such a payment without seeking a direction from HMRC if they ‘reasonably believe’ the conditions of the Treaty are  met.

Action required

  • Payments -  UK payers may wish to take action promptly to mitigate tax costs to the business and obtain a direction from HMRC, prior to making any payment of interest under any reduced rate. This process can take up to 90 days. Failure to withhold and report income tax to HMRC may result in interest and penalties being charged. Where direction from HMRC is not obtained in advance, it will be necessary for the UK payer to deduct, report and remit income tax at the 20% rate and make a subsequent application to reclaim any overpaid amount, where Treaty conditions are met. This delay may in some circumstances affect the cash flow for the business.
  • Receipts- UK recipients should check whether their future income may be reduced by overseas withholding taxes and whether there is mitigation available under the Double Tax Treaty. If mitigation is available, the paying company may need to receive clearance from the domestic authority to apply the mitigated rate before payment.

How can we help?

We can assist in undertaking a review of your business’ payments and receipts, exposure to taxes and available mitigations. We can also help prepare the application to HMRC to seek a reduction, elimination or repayment of withholding taxes. If you require any assistance please contact Sara Kang, DD 01932 830663, email: sara.kang@wardwilliams.co.uk or your usual contact at Ward Williams.