Where FICO (International) issues an authority to a company
paying interest and/or royalties not to deduct tax or to deduct tax
at a reduced rate (see DT1820), Rule 6 of SI70/488 provides that
for the purposes of ICTA88/S338 (4) such payments are to be treated
as if tax had been deducted at the basic or lower rate, as
appropriate, in accordance with ICTA88/S349 or ICTA88/S350. They
are therefore to be regarded as deductible for Corporation Tax
purposes if the general conditions in ICTA88/S338 are satisfied.
The interest Article in many double taxation agreements
overrides the provisions of ICTA88/S209 (2) (e) (iv), which
requires interest to be treated as a distribution (but see DT215
for the position after 28 November 1994). The terms of the interest
Article vary from agreement to agreement but, in general, they
provide that such interest is not to be treated as a distribution
except where more than 50 per cent of the voting power in the
non-resident company receiving the interest is controlled by United
Kingdom residents. Where the agreement overrides the Section 209
(2) (e) (iv) provisions, the payments will also be regarded as
deductible for Corporation Tax purposes if the general conditions
in ICTA88/S338 are satisfied.
Where an application is made for exemption or partial relief
from United Kingdom tax, or the title to exemption or partial
relief is re-investigated (see DT1821 sixth sub-para.), FICO
(International) will, in appropriate cases, make the necessary
enquiries of the recipient to determine whether the appropriate
Article of the double taxation agreement is overruled. He may also
ask the Inspector (see DT1910).
Advise FICO (International) if, in any case for which an
exemption or partial relief authority is held, it is established
that the payments are distributions. Where, however, the status of
the recipient has to be established before a decision can be made
and there is insufficient information on the file, advise FICO
(International) that the payments would fall to be treated as
distributions if the relevant Article of the agreement were
ignored. FICO (International) will then make the necessary
enquiries.
As regards payment of interest or royalties made under `free
of tax' agreements, see DT1836 - DT1840.
