INTM505150 - Payment of interest overseas: deducting income tax

History

FA96 made fundamental changes to the law regarding interest. Detailed guidance on the current regime is to be found in the Corporate Finance Manual.

Before FA96, the basic scheme of the law on payments of cross-border interest to non- residents provided that either

• income tax was deducted from the interest at source and the payer took a deduction for the interest paid, or
• interest was paid in full, but the payer was not permitted to take a deduction for the interest paid.

Over many years, this basic scheme became modified, so that the original intentions were rarely achieved in practice. A number of specific statutory relaxations and Extra Statutory Concessions were introduced. Gross payments of interest were permitted under the terms of double taxation agreements.

ICTA88/S338(1) provided that charges paid out of profits brought into charge to corporation tax were to be allowed as a deduction against total profits. ICTA88/S338(1) included in the definition of a charge

1. any yearly interest and
   
   
2. any other interest payable in the UK on an advance from a bank carrying on a bona fide banking business in the UK or on an advance from a person carrying on business in the UK as a stockbroker or discount house.
   
   

The limits to relief were expressed in ICTA88/338(4) - (6). The availability of relief as a charge was very wide where the interest was paid to a UK resident. However, where the payment of interest was to a non-resident, ICTA88/S338(4) made further conditions for deductibility of yearly interest. These conditions were that the payment was made by a resident company and

the paying company deducted tax under ICTA88/S349 and accounted for the tax deducted or
the payment was of interest on a quoted Eurobond within ICTA88/S124 or
the payment was one of interest within ICTA88/S340 or
the payment was one payable out of income brought into charge to tax under Case IV or V of Schedule D.
The first condition was also satisfied where, in accordance with the terms of a double taxation agreement, interest was paid in full or subject to a reduced withholding tax, after the non- resident's recipient application for relief had been submitted and authorised. In these circumstances, SI1970/488 treats the payment as having been made under deduction of tax even though no actual deduction, or a reduced deduction, had been made.

After FA96, tax relief for the payer of cross-border interest is not directly linked to the question of whether the non-resident recipient is taxed on their UK source income.