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Update on withholding tax on royalty payments

04 July 2016

In Budget 2016, the Government announced that it would extend the circumstances where withholding tax can be applied to royalty payments – as explained in the May 2016 edition of Business Edge.

As Royal Assent to the Finance Bill 2016 will not now take place until the autumn, the Government announced that the withholding tax changes were to take effect from 28 June 2016. The following additional provisions were introduced at the Public Committee Stage:

  1. The definition of the class of royalties that require the payer to withhold tax from a royalty payment will be aligned with the definition of a royalty for the purposes of the OECD model tax treaty. The new definition will, for example, now include royalties for the use of trade names and trademarks that are not annual payments
  2. A royalty that is connected with a trade carried on through a permanent establishment (PE) in the UK, will be treated as having a UK source
  3. A royalty connected with an “avoided PE” will potentially be chargeable to diverted profits tax at 25% (but there is no requirement for deduction of tax at source).

Full details of these additional measures are contained in HMRC’s updated Technical Note of 27 June 2016.

Overview of the new withholding tax position

The following updated flowchart sets out the probable new position for most UK companies making royalty payments to overseas companies and other recipients.

Note: this is a general overview and specific advice should be taken on a company’s particular circumstances before undertaking any action.