INTM630460 - Royalty Withholding: UK Source: Examples

Sales support – dependent agent permanent establishment

A non-UK resident group sells internet advertising space to UK customers. There is a UK dependent agent permanent establishment as contracts are concluded in the UK with the sales staff of the PE.

In order to carry out its business of selling advertising space the non-UK resident has acquired a licence from a connected party to exploit intellectual property in a defined geographical area, including the UK. A royalty is payable under the licence agreement.

The trade of the UK PE is to support and conclude sales that exploit the intellectual property for which the non-resident pays a royalty. The royalty payment is therefore connected to the trade carried on in the UK through a PE and so has a UK source. As the payment covers a wider geographic region, an apportionment of the total payment will need to be made.

Sales support - fixed place of business permanent establishment

A non-UK resident group sells internet advertising space to UK customers. All significant people functions relating to the conclusion of sales to UK customers take place outside of the UK and there is no dependent agent permanent establishment. However, the non-UK resident does have at its disposal an office in the UK which provides client management services to the non-resident. As such, it has a fixed place of business permanent establishment. Under CTA09/S19, this PE is awarded with a mark-up on its costs given the relatively routine nature of the functions that it performs.

In order to carry out its business of selling advertising space the non-UK resident has acquired a licence from a connected party to exploit IP in a defined geographical area, including the UK. A royalty is payable under the licence agreement.

The support activity undertaken by staff through the fixed place of business is to support sale of services that exploit the IP for which the non-resident pays a royalty. The royalty payment is therefore connected to the trade carried on in the UK through a PE and so has a UK source. As the payment covers a wider geographic region, an apportionment of the total payment will need to be made. An apportionment would also take into account the relative roles played by the UK PE and the non-UK resident, taking into consideration all the circumstances.

Apportionment – not all of the royalty relates to activities of the UK permanent establishment

A non-UK resident provides a range of goods and services. The non-UK resident makes a royalty payment for use of a range of intellectual property related to two distinct operations:

  • For use of intellectual property within a manufacturing process.
  • Digital services that involve the use in IP.

The goods manufactured under 1. are not sold in the UK.

The royalty payment made in connection with the intellectual property used in 2. is connected to sales made to UK customers. The UK PE facilitates sales connected to this intellectual property.

Only part of the non-UK resident’s trade is carried on through the UK PE. An apportionment of the payment will be required to establish the amount with a UK source. In this example, such an apportionment would exclude the amount paid under 1. and apply to the payment under 2.

This might subsequently be apportioned if the royalty also relates to non-UK use of the intellectual property (e.g. the total payment is made up of UK sales and sales from other countries). Further apportionment as outlined in INTM630440 would be appropriate in such circumstances.

Multiple lines of business

A multinational group has three lines of business that result in UK sales:

  • Large customers - those with sales over a certain threshold. These customers have a designated relationship manager in the UK who works with the customer to tailor delivery to their needs. These customers buy access to user information and targeted advertising through bespoke website placements and customised messaging to users.
  • Smaller customers. These customers purchase primarily advertising space, either on an ad hoc basis or on a small scale. This activity is done by UK staff who source such customers and as well as sales work prior to conclusion of contract with the non-resident.
  • End users. These are UK individuals that use the group’s website (for example they subscribe to the platform or make purchases direct with the non-UK resident). These users have never had any contact with any staff in the UK.

The royalty payable from non-resident is based on UK sales, with differing thresholds for each line of business.

All staff are employed by a UK subsidiary which provides sales and marketing services to the non-resident. The role of these staff in concluding contracts with customers under heading 1 and 2 is such that the non-UK resident has a UK dependent agent permanent establishment.

All activity in 1 and 2 is related to generation of UK sales. The proportion of the royalty with a UK source will be calculated by reference to each line of business (e.g. (UK sales/ total sales x royalty payable for line of business 1) + (UK sales/ total sales x royalty payable for line of business 2)).

The activity in 3. has no direct connection with UK activity. These end users have no contact with any staff in the UK nor is their purchase influenced by any activity undertaken by the UK PE; for example, all advertising of website/ services to end-users is co-ordinated by the non-resident.

The activity is not in connection with the activity undertaken by the UK PE; the activity is distinct, separate and focussed on a different group of customers with no overlapping activity. This will rely on demonstration that none of the activity undertaken as part of 1 and 2, nor any other functions performed by the UK permanent establishment, are connected to sales under 3.

S577A(4): anti-avoidance provision

A non-UK resident pays a royalty, part of which has a UK source. The group decides to move intellectual property from a country which does not have a DTA with the UK to a country with a UK DTA that provides for residence state taxation. This means there is a UK source for royalties, but taxing rights belong to the recipient jurisdiction. The royalties are subject to little or no taxation in the new recipient country.

The group has a significant call centre operation in that jurisdiction, but no other staff. The group did not previously manage any of its intellectual property from that jurisdiction.

Based on the facts above, it is likely that one of the main purposes of moving the intellectual property was to avoid the effect of S577A(1) which, absent the changes, would have resulted in a UK source subject to UK income tax. There are no other business purposes for moving the IP, or if there are, this benefit is peripheral. The anti-avoidance rule would apply.

The conclusion may change depending on the wider circumstances of the move. Other factors that may be relevant include:

  • whether the move is part of a wider group-wide consolidation of intellectual property and R&D activities,
  • whether the group has sufficient staff to manage, maintain, develop and enhance the IP in that country,
  • quantified non-tax economic benefits of moving the IP. Tax may be a consideration in the reorganisation, but is one of many factors considered.

This list is not exhaustive. As the legislation does not define what is meant by a ‘main purpose’ or ‘one of the main purposes’, these expressions have to be applied objectively, having regard to the full context and facts.