INTM506010 - Payment of interest overseas: double taxation agreements

Overview

When a company pays yearly interest ( INTM505020) to a non-United Kingdom resident, it is obliged to deduct income tax from the payment and account for that tax to the Inland Revenue under ICTA88/S349(2)(c).

Where there is a double taxation agreement ('DTA') between the country of residence of the recipient of interest and the United Kingdom, the agreement will commonly provide for full or partial relief from United Kingdom income tax on cross-border interest income. The terms of the particular agreement should always be reviewed as the relief available will depend upon the precise terms of the agreement.

Relief is not given automatically: a claim for repayment or application for relief at source must be made. Only the non-resident recipient may make the claim or application for relief. The claim or application must be made to the Centre for Non-Residents ('CNR'). Full current contact details and claim and application forms are to be found on the CNR website.

The legislation introduced by FA 2004 includes a claim under ICTA88/SCH28AA/PARA 6C for exemption in respect of any non arms-length interest. The PARA 6C claim can be made either by the overseas recipient or by the UK payer on their behalf (see INTM560000 for full details). From 1 January 2004 claims for exemption from the requirement to deduct withholding tax can also be made under the European Directive (see INTM400000 onwards)

Until treaty clearance is given by CNR, no payer is entitled to assume that the treaty rate will apply so that it need not withhold tax. See INTM506030 for further information on the law and practice applicable to treaty clearance applications.

CNR reviews the claim or application and supporting documentation and will ask the payer’s tax office for a report to enable it to be satisfied that the conditions for relief specified in the relevant DTA are met. CNR will consider

• whether the payment is within the definition of interest according to the particular agreement
• whether the overseas claimant is the beneficial owner of the interest or, less commonly, whether the overseas claimant is subject to tax in their country of residence on the interest
• whether there is a special relationship between the parties
• whether the treaty includes anti-treaty shopping provisions and, if so, whether these are in point
• whether the claimant has a United Kingdom branch and, if so, whether the interest is effectively connected to the United Kingdom branch.

Where it is found that interest paid is excessive by reason of a special relationship then the excess amount will not be treaty protected and will be subject to United Kingdom income tax. Not all treaties have a special relationship clause. From 1 April 2004 excessive interest can be paid gross if an ICTA88/SCH28AA/PARA 6C claim is made.

CNR will also ask the Inspector dealing with the United Kingdom payer to review and report on the claim or application under the Form 4450 procedure. The Inspector of Taxes is responsible for ensuring that the payment is treated correctly in the United Kingdom payer's computations.

Any contentions that the wording of DTAs overrides the operation of domestic provisions which would otherwise disallow excessive interest (e.g. ICTA88/S209(2)(da) prior to 1 April 2004, or ICTA88/SCH28AA thereafter) should be referred to the Thin Cap/Arbitrage Group at CT & VAT,International CT, except for:

• the treaties with Austria, Fiji, Israel and Sudan (which provide for deductions for recharacterised interest)
• the treaty with Spain (which effectively overrides ICTA88/S209(2)(da)).

CNR determines whether relief is available and, if it is, relief at source will normally be authorised for future payments. CNR will issue a notice in writing under SI1970/488 to the United Kingdom payer to pay the interest either

• without tax deducted or
• with tax deducted at a reduced rate, as specified in the relevant DTA.

If income tax has been deducted from previous payments of interest, repayment of the excess tax deducted will be made.

CNR will review the authorisation periodically. Authorisations will cease to be valid if there is a material change in circumstances. The non-resident is required to notify CNR if there are any changes to the information provided in the claim or application. Authorisations to United Kingdom payers to pay gross or at a reduced rate of deduction cease to have effect if

• there is any change in the nature or description of the income
• the United Kingdom payer learns of any change in the residence status or business details, including changes in name, address or ownership (by way of business sale, transfer or merger) of the recipient of the income
• there are any changes in the United Kingdom payer's business details, including changes in name, address or ownership (by way of business sale, transfer or merger).

Further details of the action which CNR will take in these circumstances are given in CNR DT Guidance Note No. 2 11/02.