Some treaties contain anti-abuse provisions within the royalty
Article. One form of such a provision is found in the royalty
Article of the agreement with France: `The provisions of this
Article shall not apply if the right or property giving rise to the
royalties was created or assigned mainly for the purpose of taking
advantage of this Article and not for bona fide commercial
reasons'.
A more modern form of the provision is found in, for
example, the royalty Article of the agreement with Korea: `The
provisions of this Article shall not apply if it was the main
purpose or one of the main purposes of any person concerned with
the creation or assignment of the rights in respect of which the
royalties are paid to take advantage of this Article by means of
that creation or assignment.'
Where there is a provision of the kind described above, FICO
will consider whether the facts and circumstances of a particular
claim are such that the provision should apply to deny relief from
United Kingdom tax.
The diagrams below illustrate the sorts of issues that might
arise.
By channelling the royalty payments through a treaty partner country, the non-treaty partner is effectively receiving the royalties gross. If the royalties were paid directly to the non-treaty partner country, they would be subject to deduction of Income Tax.
