With the expiry of the Brexit transition period as of 1 January 2021, the United Kingdom is no longer bound by EU law, including the Interest and Royalties Directive (hereafter “IRD”). The IRD provides for an exemption of withholding tax on payments of interests and royalties between associated companies within the EU.
In its Spring Budget 2021, the United Kingdom announced to repeal the domestic provisions implementing the IRD. As from 1 June 2021, interest and royalty payments will be subject to 20 % withholding tax in the UK, unless relief is available under a double tax treaty. This change in UK law may affect EU-based companies receiving royalty or interest payments from associated companies in the UK which previously benefitted from the exemptions under the IRD.
The impact for Belgian companies is however mitigated under the Belgium/UK double tax treaty allocating exclusive taxing rights on royalty payments to the recipient’s state of residence. Hence, the UK should exempt UK sourced royalty payments to Belgian recipients from UK tax. The treaty does not require a formal request or permission from the UK tax authorities (‘HMRC’) for the withholding tax exemption on royalties to apply.
With respect to interest payments, the Belgium/UK double tax treaty limits taxation in the source state to 10 % of the gross amount. In addition, the tax treaty also provides for certain exemptions from taxation (e.g. interest paid in respect of a loan granted by an enterprise to another enterprise), on the condition that the interest payments are “at arm’s length”. If not, the UK may tax the “excess amount of interest”.
The relief from UK withholding tax on interest payments will not be granted automatically by HMRC. A Belgian company that was granted an exemption under the IRD can apply for treaty relief by confirming its “exemption notice" to HMRC. More specifically, a Belgian company needs to confirm that it is a Belgian resident for tax purposes and that none of the circumstances relevant to relief under the tax treaty have changed. This option can only be used for existing loans (i.e. not new loans) for which an exemption under the IRD was granted. Another option to claim treaty relief on interest payments is by using the “DT-company form”. This form should be certified by the Belgian tax authorities, confirming the tax residence of the Belgian company, and sent to the HMRC. Belgian corporate lenders that regularly lend to UK resident companies may also claim treaty relief under the “Double Tax Treaty Passport Scheme” by applying for a Double Taxation Treaty passport (form DTTP1).
Following the implementation of the Multilateral Instrument (‘MLI’), a so-called ‘principal purpose test’ was added to the provisions relating to interest and royalty payments under the Belgium/UK double tax treaty. Treaty relief is therefore not available if the main purpose or one of the main purposes of the transactions - in respect of which the royalties or interests are paid - was to obtain treaty benefits.
Belgian companies doing business in the UK need to check whether these changes may affect them.
Anouk Van der Mast - Associate (Anouk.email@example.com)
Tiberghien’s international tax team will continue to monitor these and other tax developments relevant for Belgium / Luxembourg based multinational enterprises. Our editorial board consists of:
- Koen Morbée (International and EU corporate tax, firstname.lastname@example.org);
- Michiel Boeren (International and EU corporate tax, email@example.com);
- Katrien Bollen (HR tax and global mobility, firstname.lastname@example.org);
- Ben Plessers (Transfer Pricing and Valuations, email@example.com);
- Gert Vranckx (VAT, customs, excises and other indirect taxes, firstname.lastname@example.org);
- Rik Smet (International and EU corporate tax, email@example.com).
In case you have further questions on this publication or want to discuss a tax query, please do not hesitate to contact the author or one of the members of the editorial board.