There are a number of specific exemptions from the obligation to
deduct tax from cross-border payments of yearly interest.
The principal exemptions for cross-border payments of
interest are:
'Banking' exemptions
Quoted Eurobonds
In addition, there is a wide-ranging exemption for domestic
payments of interest:
Intra-UK corporate interest
There is no obligation to deduct tax from cross-border interest which would otherwise come within the ICTA88/S349(2)(c) definition ( INTM505020) in the following circumstances:
'Bank' has the meaning given by ICTA88/S840A.
Under the first exception, banks may pay interest gross where
the interest is paid in the ordinary course of business. Further
guidance on the interpretation of 'in the ordinary course of
business' is to be found in the Banking Manual at BAM31230 et seq.
The second exception
, at ICTA88/s349(3)(i), was introduced in FA 2002
and aims to mirror for such authorised persons the exemption
enjoyed by banks from the requirement to deduct tax at source from
yearly interest payments made in the ordinary course of their
business. This exception is likely to be relevant to financial
dealers which are authorised for the purposes of the Financial
Services and Markets Act 2000, but which are not banks.
There is no obligation to deduct tax from interest payments on quoted Eurobonds. See INTM505050 for further information.
With effect from 1 April 2001, there is no obligation to deduct
income tax at source from payments of interest between companies
where, at the time of payment, the paying company reasonably
believes that the recipient company is within the charge to UK
corporation tax (ICTA88/S349A and S349B). The recipient company
must be beneficially entitled to the interest.
Further information on these provisions, including guidance
on the reasonable belief test, may be found at CTM35215 and in Tax
Bulletin TB54.
