INTM504030 – Intra-group funding: inward investment

Withholding taxes

The term 'withholding' covers the general collection mechanism for income taxes on non- residents who do not have a taxable presence in the UK. Whilst non-residents may receive returns from lending into the UK in various forms, the UK’s legislation restricts the categories of non-residents’ UK source income from cross-border lending that it taxes. In general, non- residents are taxed only in respect of yearly interest from the UK and the income tax is collected by the payer through the withholding mechanism (for further details see INTM505000 onwards).

But tax relief for the payer is not directly linked to the question of whether the non-resident recipient is taxed on their UK-source income. So, for example, relief might be available to the UK issuer of a discounted note even though the UK will not tax the discount in the hands of the non-resident noteholder. And, conversely, the fact that a non-resident recipient of UK interest suffers UK income tax (by way of withholding) does not guarantee deductibility to the payer. The debt could, for example, be a loan relationship for an unallowable purpose under FA96/SCH9/PARA13 (see INTM509030 onwards, as well as CFM6210 and CT12670).

Technically, the UK does not have a withholding tax, since it taxes all interest as it arises, but the term is convenient for the present purposes and not misleading.