As part of the Government’s crackdown on profit shifting by multinationals from the UK to low or no-tax jurisdictions, the Chancellor has announced in Budget 2016 a package of enhanced withholding tax measures which are designed to ensure that companies are not able to use intragroup royalty payments for avoidance.

To achieve this aim the Government will change the withholding tax regime so that it applies to all international royalty payments arising in the UK unless a double tax treaty or the EU Interest and Royalties Directive means that a withholding is not required.

There will be three important elements to this reform: 

  • UK withholding will apply to a wider definition of intangible assets, including brands and trademarks;
  • the UK will create a domestic anti-treaty abuse provision which will prevent, for instance, royalty payments being paid to tax havens without deduction of tax via the use of conduit/connected companies; and
  • the UK will ensure that withholding tax will apply to payments that are attributable to a UK permanent establishment, even if the payment of the royalty is not made from the UK.

The new measures will apply to royalty payments made under avoidance arrangements from 17 March 2016.  The changes to the definition of royalties and the source rules affecting permanent establishments will apply for payments made on or after the date of Royal Assent to the Finance Bill 2016.

Although the aim of the Government is clear and indeed sits alongside other measures it has introduced, such as the Diverted Profits Tax, to ensure that multinationals do not take unfair advantage of the UK tax regime, the widened scope of the withholding tax rules is likely to create significant uncertainty for companies who may not necessarily consider themselves to be undertaking abusive practices.  Multinational groups will need to review their current royalty payment arrangements once the detail of the proposed legislation is available to determine the impact of these measures. 

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