INTM630430 - Royalty Withholding: UK Source: In connection with a trade carried on by the permanent establishment

ITTOIA05/S577A determines that royalties and payments related to intellectual property paid by a non-UK resident have a UK source if they are connected with a trade carried on by that non-UK resident through a UK PE. For there to be a connection between the payment of a royalty by the non-UK resident and the trade of the UK PE, the intellectual property to which the royalty relates must be exploited in the UK. The trade of the UK PE must be connected to that exploitation. This might include, for example, sales or sales support activity related to the sale of products that exploit the relevant intellectual property.

The PE does not have to conclude contracts in relation for those sales for the IP payment to be made in connection with the trade of the PE.

A royalty payment may be made in connection with the trade of a UK PE for the purposes of S577A without that PE having a deduction for such a payment for UK corporation tax purposes under CTA09/PART2/CH4. A PE may have little or no profit attributed to its activities, but still create a UK source for royalty payments made by the non-UK resident.

See section INTM630460 for examples of how this rule applies.

Royalty payments included in the payment for other goods and services

In some cases, the royalty payment will be included within a payment for a range of goods, services or rights. The element of such payments that are related to intellectual property have a UK source, provided the conditions of S577A are satisfied. See INTM630330.