Corporate Tax London Client Alert April 2016 UK royalty tax changes set to impact IP holding structures Last month the UK Government announced sweeping changes to the UK taxation of outbound royalties: 1. Treaty override rule for royalties paid by a UKCo where one of the main purposes is to obtain a tax advantage by virtue of a double tax treaty provision. 2. Bringing royalties on all types of IP within the charge to UK domestic withholding tax (WHT), including trademarks, customer lists and know-how. 3. Royalties to have a deemed UK source where the payer is a non-UK resident carrying on business through a UK permanent establishment (PE) or a deemed UK PE under the diverted profits tax regime (DPT). The anti-treating shopping rule at 1 above applies to royalties paid on or after 17 March 2016. The remaining changes will affect payments made on or after the date of Royal Assent of Finance Bill 2016 (expected July 2016). Effect/impact Critically, any group with a non-UK resident principal selling directly into the UK, with the UK entity making royalty payments, is at risk. Groups that previously did not have a DPT issue, as a result of having sufficient UK profit allocation to cover profits attributable to a deemed PE, will now need to consider the royalty position of the deemed PE. There will be a UK WHT liability of up to 20% on the gross amount of the royalties. For a deemed PE, such royalties are disregarded in the computation of taxable diverted profits meaning the effective extra tax could be up to 25% of the royalty attributable to the deemed UK PE. Possible solutions Depending on a group's circumstances, the following may be courses of action worth considering: • Transfer IP into the principal territory? Could this be only IP attributable to the UK PE? • Can a non-resident IP owner be converted into a manufacturing principal? www.bakermckenzie.com For further information please contact Mark Bevington +44 (0) 20 7919 1453 firstname.lastname@example.org Richard Fletcher +44 (0) 20 7919 1771 email@example.com Geoffrey Kay +44 (0) 20 7919 1787 firstname.lastname@example.org James Wilson +1 212 626 4812 email@example.com 2 Client Alert April 2016 • Can the UK entity be converted into a reseller/distributor? Is this legally possible and what are the systems implications? • Could IP be contributed to the principal for a fixed period in return for a capital lump sum? The right course of action is likely to be heavily dependent on the nature of what is sold and where activities take place. As there are only three months prior to the changes being fully effective, an early consideration of options is recommended. ©2016 Baker & McKenzie. All rights reserved. Baker & McKenzie LLP is a limited liability partnership registered in England and Wales with registered number OC311297. A list of members’ names is open to inspection at its registered office and principal place of business, 100 New Bridge Street, London, EC4V 6JA. Baker & McKenzie LLP is a member of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the terminology commonly used in professional service organisations, reference to a "partner" means a person who is a member, partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm. Baker & McKenzie LLP is regulated by the Solicitors Regulation Authority of England and Wales. Further information regarding the regulatory position is available at http://www.bakermckenzie.com/london/regulatoryinformation/. This may qualify as "Attorney Advertising" requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.