Budget: UK’s domestic legislation

Today’s Budget includes a repeal of the UK’s domestic legislation implementing the EU Interest and Royalties Directive (IRD), effective from 1 June 2021. This legislation (sections 757 to 767 of the Income Tax (Trading and Other Income) Act 2005) provided an exemption from withholding tax on intra-group interest and royalty payments from UK to EU companies. Taxpayers should therefore carefully check their agreements for interest-bearing investments and royalty agreements, for the impact of any ‘grossing up’ clauses, to determine whether they will be required to make increased royalty payments as a result of the withholding tax now charged.

The IRD removed the need to impose withholding taxes on payments of interest and royalties between associated companies within the EU. ‘Associated’ is defined differently to the normal Corporation Tax definition:

• 25% or more of the capital in the other; or
• 25% or more of the voting rights in the other.

Or, a third company also resident in the UK or EU must hold directly:

• 25% or more of the capital in each of them; or
• 25% or more of the voting rights in each of them.

From 1 January 2021, the UK could no longer benefit from the IRD – this immediately had an impact for payments made from EU member states to the UK. Instead, companies must refer to the terms of the applicable double taxation agreement between the UK and the relevant EU member state to determine the appropriate rate of withholding tax to apply. Up until today’s announcement, the provision was retained in domestic law and therefore interest and royalties paid from the UK to an EU member state still had a withholding tax rate of nil.

For companies that relied on this provision, the relevant double taxation treaty must be checked for the correct treaty rate going forward. In double taxation agreements with several EU jurisdictions the minimum withholding rate is more than 0%.

If you have any questions, please speak to a member of our Tax team or your usual haysmacintyre contact.