Royalties – “another step towards the government’s longer term ambition of domestic and international reform”

The UK has announced that it will introduce a new tax from April 2019 which will apply to payments of royalties and certain other payments, such as franchise fees, between members of international groups, where there is a link between the payments and the UK. The tax is to be imposed by way of a deemed withholding on the payer, even if the payer is based outside the UK.

This measure is part of the UK’s wider response to the challenges it sees with the taxation of the digital economy. However this new tax is not restricted to just the digital economy – and will apply to those businesses with high value intellectual property or intangible assets (for example, brands) held offshore.

The UK Government has indicated in their Position Paper on “corporate tax and the digital economy” that they are considering further measures to ensure that digital companies are taxed appropriately. Businesses should consider whether their existing arrangements are still appropriate in the light of possible future changes.

The UK propose to extend the circumstances in which a payment of royalties, or certain other payments are subject to withholding tax. The new charge will apply to royalty and other payments between group members. In particular:

• Withholding tax will be due on royalties and to payments for the use or exploitation of rights over intellectual property and other intangible assets in the UK. This will expand the types of payment which are potentially subject to UK tax to include payments for the right to distribute goods or to provide services in the UK. It will not apply to payments for services.
• The tax liability can arise, where the payer does not have a UK presence and the payment does not have a UK source.
• The new measure will apply to payments between connected persons.
• The new withholding tax will apply where payments are made to a person in a jurisdiction which does not have a treaty with a non-discrimination article with the UK. This is designed to catch payments to low tax jurisdictions.
• The withholding will only apply to payments to extent they can be attributed to sales in the UK. How a royalty payment is allocated between sales in the UK and other sales, is likely to be an area of focus during the consultation.
• If the tax is not paid, any group company which is UK resident or has a UK presence is jointly and severally liable for the tax.
• It is not known if this new tax will be creditable for non-UK tax purposes.

The consultation confirms that the UK will not be amending the existing rules which impose withholding tax on royalties or diverted profits on royalties paid by a non-UK company in connection with an avoided permanent establishment in the UK. Instead, where a taxpayer finds itself subject to one or more of the new rules or the existing regimes, he will taxed under whichever set of rules results in the highest tax charge.

The UK Government is consulting on these proposals set out in this briefing until 23 February 2017. We would be delighted to discuss the practical impact of these proposals with you or to discuss the Government’s position paper on “corporate tax and the digital economy”.