Currently, by virtue of a combination of UK domestic law and the application of double tax treaties, certain royalty payments can be made to offshore recipients without withholding income tax. Whether income tax is deducted depends on the type of royalty payment and the country of residence of the recipient.
Finance Bill 2016 will introduce a new ITA 2007, s 917A which will apply where a royalty payment is made to a connected person as part of arrangements intended to obtain a tax advantage by virtue of a provision of a double tax agreement (DTA) other than where the benefit is in accordance with the object and purpose of that DTA.
Legislation will also be introduced to amend the definition of intellectual property rights in respect of which there is a duty to withhold income tax.
The aim of these changes is to ensure that companies that are members of international groups do not avoid UK taxation by virtue of royalty payments to offshore companies without any obligation to withhold taxes, either by “treaty shopping” or by ensuring that the form of the intellectual property is such that it falls outside the domestic requirement to withhold taxes.