Withholding taxes

Actions for groups to avoid cashflow drag and cost

Cross‑border payments of interest, royalties and dividends are commonly subject to withholding tax (WHT), meaning tax is deducted before the recipient is paid. Although treaty relief may be available, delays in getting the right paperwork in place in time can result in delays in obtaining relief for or repayment of the WHT. Sometimes WHT can be an actual cost, materially impacting returns.

As many taxpayers only realise the implications of WHT when they are due to make or receive a payment to which WHT may apply, this article sets out an overview of how WHT applies, and some WHT planning points for UK companies to help avoid a costly error or cashflow delay.

During 2021, the UK lost the benefit of two valuable EU tax reliefs in relation to WHT on interest, royalties, and dividends. These broadly meant that UK companies did not need to withhold tax on interest, royalty, and dividend payments within an EU group. Since 2021, UK companies need to be aware of their WHT obligations and manage cashflow implications of WHT rules in respect of all interest, royalty and dividend payments with both their EU and non-EU counterparts.

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 reviewed. It may exempt dividends from WHT, as in the case of France or Spain, for example, or impose a limit on the level of WHT that can be deducted. If there is no double taxation treaty, then domestic WHT rules apply.

To benefit from the reduced treaty rate, a new or revised WHT application may need to be submitted to the taxing authority of the payer.

Some territories (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.

Simon Crookston

Simon Crookston, Partner

"In many, but not all situations, the UK’s double taxation network 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 can 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 deducted. WHT is an obligation of the paying company and HMRC’s published position is that the obligation for a UK borrower to deduct WHT from an interest payment is not avoided where treaty relief may be available (or is later claimed).

Historically, HMRC has applied a pragmatic approach and where the lender was treaty entitled, HMRC had said that it would typically assess the borrower for late payment interest only (effective from 4 May 2023) recognising that the underlying tax would (in effect) be repayable to the lender anyway under the treaty process. However, this approach has been paused. This means that (for now) borrowers may be at risk of assessment for the WHT itself plus late payment interest, even where the lender is ultimately treaty entitled.

The change in HMRC approach means that it is now more important than ever for UK borrowers to ensure any treaty clearance to pay interest gross has been notified by HMRC before they pay interest. For example, a paying company should request a copy of the notification. In the absence of a notification by HMRC that reduced treaty rates apply, the prudent approach for the payer may be to account for WHT.

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 in the territory of the borrower and in the appropriate double taxation treaty between the UK and the relevant paying company’s 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 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.

Stuart Weekes

Stuart WeekesPartner

"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.

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.

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 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.

Jane Mackay

Jane Mackay, Partner Corporate Tax

"With increasing costs being suffered by UK businesses, it is important that businesses with overseas interests and transactions regularly monitor the WHT status of their payments and receipts, particularly if they are charities, non-taxpayers, or are a loss-making entity, where WHT could be an absolute cost as well as a cashflow issue.

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 get in touch with us or your usual Crowe contact.