Withholding taxes: actions for groups with UK and EU members
Tax is often withheld when interest, royalties or dividends are paid by a company in one country to a recipient in another. This means that the recipient receives the net amount after tax has been deducted, which creates a cashflow problem and can lead to delays in receiving any credit for the tax withheld.
During 2021, the UK lost the benefit of two valuable EU tax reliefs in relation to withholding tax (WHT) on interest, royalties and dividends. These two reliefs are:
EU Parent Subsidiary Directive (PSD)
For EU groups of companies, dividends can be paid between associated companies without the need for tax to be withheld.
EU Interest and Royalties Directive (IRD)
The IRD allows EU companies to make interest and royalty payments to associated organisations within the EU without needing to deduct tax from the payments.
A summary of the current position is as follows:
Dividend payments from the UK
The UK domestic law does not currently impose any obligation to withhold tax on dividend payments.
Dividend payments to the UK
The applicable double taxation treaty will need to be considered to see if it totally exempts dividends from WHT, as in the case of France or Spain, for example, or whether it imposes a limit on the level of WHT that can be deducted.
To benefit from the reduced treaty rate, a new or revised WHT application may need to be submitted to the EU taxing authority of the payer.
Some EU member states (e.g. Portugal) will only allow a reduced rate of tax under the double taxation treaty if the dividends received by the UK company are ‘subject to tax’ in the UK. A decision will therefore need to be made as to whether it is advantageous to elect for the dividend received in the UK to be taxed to secure the treaty rates of WHT.
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Simon Crookston |
"In many, but not all situations, the UK’s double taxation network with EU countries will enable groups to mitigate the WHT requirement. However, treaty reliefs are not automatic and generally must be applied for from the local taxing authority. This process can be time consuming and can, in some situations, lead to payments needing to be delayed to prevent WHT occurring. I would strongly advise companies with overseas operations, to continually evaluate their cross border transactions, identify where they may have a potential WHT tax problem so they can put appropriate treaty applications in place." |
Interest and royalty payments from the UK
Royalty payments are able to be made gross and without UK WHT being deducted if the payer reasonably believes that the payment meets the conditions for exemption as set out in the UK tax legislation.
The UK tax legislation also allows for interest payments to be paid gross. However, this exemption is not automatic and the person receiving the interest payments needs to apply for the exemption by completing the appropriate treaty relief form. This form also enables a repayment claim to be made for any WHT suffered.
Interest and royalty payments to the UK
The quantum of tax to be deducted at source will be determined by the level set under domestic law and in the appropriate double taxation treaty between the UK and the EU member state. In many cases, such as the Spanish, French and German treaties there is full exemption from WHT.
To benefit from the tax treaty, a treaty application form will usually be required to be completed and stamped by the overseas EU taxing authority to enable the payer to make the payment at the reduced treaty rate, or be exempted. The form can also be used to claim back some or all of the WHT already suffered within the terms of the double taxation treaty. Most of the forms which are required should be available on HMRC’s website.
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Stuart Weekes |
"In order to protect their margins, companies need to consider costs such as WHT and take mitigating actions to reduce their exposure to such taxes. This is the time to innovate and to consider whether there are other locations that combine favourable WHT rates with attractive trading markets. Failure to plan and take action may set UK companies behind the competition at a time when they are likely to need to innovate and rationalise their operations to stay ahead.” |
Actions
There are four actions we would recommend that groups with EU interests take to evaluate their current position.
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1 Review and identify existing dividends, interest and royalties that are being paid cross border. |
2 Assess whether any elections are required (and are beneficial) to tax dividends in the UK to enable treaty relief to be available. |
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3 Consider what the double tax treaty position will be; the WHT applications already in place and what new treaty forms are required in the jurisdiction of the paying company to enable payments to be made with the benefit of the treaty rate. |
4 Monitor local EU country legislation for any changes to local territory or tax treaty reliefs. Review wider group structures to assess whether it may be beneficial to reorganise or rationalise the group to reduce ongoing costs and improve profitability. |
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Jane Mackay |
"With increasing costs being suffered by UK businesses and the loss of the benefit of these directives and other reliefs since 2021, it is important that businesses with overseas interests in EU territories monitors their position, particularly if they are charities, non-taxpayers, or are a loss-making entity. It is also recommended that group structures are periodically reviewed to ensure they remain fit for purpose from both an efficiency and ongoing compliance perspective." |
For further support and assistance in evaluating your withholding tax position, please contact Simon Crookston or your usual Crowe contact.
