Taxation of offshore receipts from intangible property
12 November 2018
From 1 April 2019, Finance (No.3) Bill 2018-19 introduces a new income tax charge on certain receipts of non-UK resident people holding intangibles in offshore territories, where those intangibles support (directly or indirectly) the sales of goods or services into the UK. At Autumn Budget 2017, the Government announced its intention to charge income tax (not corporation tax) on gross income derived from intangible property held in offshore jurisdictions where it relates to UK sales. There are a number of changes announced that widen the original proposals, including:
- The mechanism for the collection of tax will be a direct assessment on the owner of the intangible property, rather than a withholding tax on payments made to the intangible property owning company by other people.
- The scope of income covered has broadened to include not only royalties but also other income from the direct or indirect exploitation of intangible property in the UK market.
- It is also widened to apply to sales through either unrelated or related parties.
- There will be a de-minimis threshold for UK sales of £10m.
- An exemption for income that is subject to tax in the territory of residence, at 50% or more of the UK tax, would be due on a UK resident receiving the payment (careful consideration will need to be paid to the actual amount of tax paid overseas before it is possible to conclude that an exemption will apply).
- An exemption where the non-UK resident intangible property owner is considered to have sufficient local substance (but subject to very restrictive conditions).
- There are anti-avoidance provisions, applicable from Budget day, targeted at arrangements that seek to circumvent these new rules.
Treatment in territories with double tax treaties
It is worth noting that the rules are intended to apply to intangible property held in territories that do not have a ‘full’ double tax treaty with the UK. While the current UK treaties with Jersey, Guernsey (including Alderney) and the Isle of Man are not ‘full’ treaties, the pending treaties (which have been signed but which are not yet in force) should qualify so these new anti-avoidance provisions will not apply once the treaties come into force. Other territories with which the UK does not have a ‘full’ double tax treaty include, for example, Bermuda, the British Virgin Islands and the Cayman Islands.
Any multinational business holding, for example, marketing or software intangibles or even goodwill in a low- or no-tax territory, where they are part of a supply chain selling directly or indirectly into the UK, will need to consider whether they will be affected.
Read more on the Finance Bill