It has been announced that there will be a repeal of the existing UK law that gives effect to the EU Interest and Royalties Directive.
This change will affect UK resident companies (or UK permanent establishments of EU resident companies) which make certain payments of interest or royalties to related companies resident in the EU. It may also impact the recipients of such payments.
The relevant existing UK law, (which will now be repealed), removes the UK withholding tax obligation that might otherwise apply to such payments of interest and royalties.
In many cases, the UK withholding tax obligation can still be reduced or eliminated by bilateral double tax agreements between the UK and its treaty partners. However the compliance obligations (in particular for interest payments) will differ. In some cases, bilateral double tax agreements will not offer equivalent protection and so increased UK tax liabilities may arise.
The repeal will have effect in relation to payments of interest and royalties made by UK resident companies (or UK permanent establishments of EU resident companies) on or after 1 June 2021.
The draft legislation includes an anti-forestalling rule which deems an effective date of 3 March 2021 for any payments made in connection with arrangements with a main purpose of securing that the existing exemptions apply.
Even though there may be no ultimate impact on tax liabilities in many cases, there will be additional compliance considerations to deal with as a result of today’s announcement.
Taxpayers will wish to examine their arrangements well in advance of the effective date in order that they can determine whether additional tax liabilities potentially arise and/or whether additional compliance requirements (e.g. tax authority certifications) are required.