Changes to withholding tax on royalties
The government plans to extend the imposition of withholding tax to payments made to non-UK residents in respect of trademarks and brand names. In addition, with immediate effect, a new anti-avoidance rule could deny treaty relief from withholding tax for royalties to a connected person via an associate in a treaty jurisdiction (such as the Netherlands) to a third (tax haven) country. This is likely to be particularly relevant to US-owned groups.
Currently, UK payers of copyright, design rights and patent royalties and certain other payments in respect of intellectual property must deduct tax at basic rate when they make payments to a non-UK resident. This is subject to any relief under a double tax treaty. However, payments in respect of trademarks and brand names are not currently subject to tax deduction.
The government now intends to extend the withholding tax obligation to catch all payments in respect of trademarks and brand names to connected and unconnected persons overseas from the date of Royal Assent to this year’s Finance Bill. The government will also deny tax treaty relief for royalty payments between connected parties where arrangements have been put in place, one of the main purposes of which is to secure a benefit that is not in accordance with the object and purpose of the treaty. This measure has effect for payments made on or after 17 March 2016. Broadly, it is designed to catch IP being held by a group company in a jurisdiction where no real activity takes place.
The changes will potentially affect any UK person (including a branch of an overseas company) making payments to non-residents in respect of trademarks and brand names. If contractual provisions require the payment to be grossed up to take account of any tax withheld also could increase substantially in respect of any IP (including trademarks and brand names) to a connected person.
Date: 16th May, 2016
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