Finance Bill

House of Commons

Session 2003 - 04
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Finance Bill

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 6 — Exemption from income tax for certain interest and royalty payments
81

      (2)
“Property managing subsidiary” means a qualifying subsidiary of a
company whose business consists wholly or mainly in the holding or
managing of land or any property deriving its value from land.
      (3)
In sub-paragraph (2) “land” and “property deriving its value from
land” have the same meaning as in section 776 of ICTA.
5
Meaning of “qualifying 90% subsidiary”
11B   (1)
A company (“the subsidiary”) is a qualifying 90% subsidiary of a
company (“the holding company”) if the following conditions are
met.
      (2)
The conditions are—
10
(a)
that the holding company possesses not less than 90% of the
issued share capital of, and not less than 90% of the voting
power in, the subsidiary;
(b)
that the holding company would—
(i)
in the event of a winding up of the subsidiary, or
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(ii)
in any other circumstances,

be beneficially entitled to not less than 90% of the assets of the
subsidiary which would then be available for distribution to
the shareholders of the subsidiary;
(c)
that the holding company is beneficially entitled to not less
20
than 90% of any profits of the subsidiary which are available
for distribution to the shareholders of the subsidiary;
(d)
that no person other than the holding company has control of
the subsidiary; and
(e)
that no arrangements are in existence by virtue of which any
25
of the conditions in paragraphs (a) to (d) would cease to be
met.
      (3)
Sub-paragraphs (4) to (10) of paragraph 11 (but not sub-paragraph
(6)(b)) apply in relation to the conditions in sub-paragraph (2) above
as they apply in relation to the conditions in sub-paragraph (2) of
30
that paragraph.”.
(6)
The amendments made by this section have effect in relation to any right to
acquire shares granted on or after 17th March 2004.
Chapter 6
Exemption from income tax for certain interest and royalty payments
35
Introductory
92
Introductory
(1)
This Chapter has effect for the purpose of implementing provisions of Council
Directive 2003/49/EC of 3rd June 2003 on a common system of taxation
applicable to interest and royalty payments made between associated
40
companies of different member States (“the Directive”).
(2)
In this Chapter—

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 6 — Exemption from income tax for certain interest and royalty payments
82


“company” has the same meaning as the expression “company of a
member State” has for the purposes of the Directive (see Article 3(a) of
the Directive);

“debt-claim” has the same meaning as in the Directive;

“the Directive” has the meaning given by subsection (1);
5

“EU company” means a company resident in a member State other than
the United Kingdom;

“interest” and “royalties” have the meaning given by Article 2 of the
Directive;

“non-EU permanent establishment” means a permanent establishment in
10
a territory other than a member State;

“UK company” means a company resident in the United Kingdom;

“UK permanent establishment” means a permanent establishment in the
United Kingdom.
(3)
The Treasury may by order make such provision amending any reference in
15
this Chapter to, or to a provision of,—
(a)
the Directive, or
(b)
any instrument referred to in this Chapter by virtue of an order under
this subsection,

as appears to them appropriate for the purpose of giving effect to any Council
20
Directive adopted after 8th April 2004 amending or replacing the Directive.
(4)
The first order under subsection (3) may make provision having effect for
periods before the making of the order.
(5)
Subject to subsection (6), this Chapter has effect in relation to payments made
on or after 1st January 2004.
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(6)
The following provisions have effect in relation to payments made on or after
8th April 2004—
(a)
in section 95(2)(b), the words “and that section 99 (anti-avoidance) does
not apply”, and
(b)
section 99.
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Exemption from income tax
93
Exemption from income tax for certain interest and royalty payments
(1)
No liability to income tax arises in respect of a payment of interest or a
payment of a royalty if, at the time the payment is made, the following
conditions are satisfied.
35
(2)
Condition 1 is that the person making the payment is—
(a)
a UK company (but not such a company’s permanent establishment in
a territory other than the United Kingdom), or
(b)
a UK permanent establishment of an EU company.

See section 94(2) as to when a permanent establishment is to be treated as the
40
person making the payment.
(3)
Condition 2 is that the person beneficially entitled to the income in respect of
which the payment is made is an EU company (but not such a company’s UK
permanent establishment or non-EU permanent establishment).

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 6 — Exemption from income tax for certain interest and royalty payments
83


See section 94(3) as to when a permanent establishment is to be treated as the
person beneficially entitled to the income in respect of which the payment is
made.
(4)
Condition 3 is that the company in Condition 1 and the company in Condition
2 are 25% associates (see section 94(4)).
5
(5)
Condition 4 is that, if the payment is a payment of interest, the Board has issued
an exemption notice in accordance with regulations under section 95.
(6)
This section is subject to—

section 98 (special relationships), and

section 99 (anti-avoidance).
10
94
Permanent establishments and “25% associates”
(1)
This section has effect for supplementing section 93 and is to be construed as
one with it.
(2)
For the purposes of Condition 1, a permanent establishment in a territory of a
company that is resident in another territory is to be treated as the person
15
making the payment (instead of the company) if, and to the extent that, (within
the meaning of Article 1(3) of the Directive) the payment represents a tax-
deductible expense for the permanent establishment in the territory in which it
is situated.
(3)
For the purposes of Condition 2, an EU company’s UK permanent
20
establishment or non-EU permanent establishment is to be treated as the
person beneficially entitled to the income in respect of which the payment is
made (instead of the company) if, and to the extent that, (within the meaning
of Article 1(5) of the Directive)—
(a)
the debt-claim, right or use of information in respect of which the
25
payment arises is effectively connected with the permanent
establishment, and
(b)
the payment represents income in respect of which the permanent
establishment is subject in the territory in which it is situated to United
Kingdom corporation tax or a tax corresponding to that tax.
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(4)
For the purposes of Condition 3, two companies are “25% associates” if—
(a)
one holds directly—
(i)
25% or more of the capital in the other, or
(ii)
25% or more of the voting rights in the other, or
(b)
a third company holds directly—
35
(i)
25% or more of the capital in each of them, or
(ii)
25% or more of the voting rights in each of them.
Exemption notices
95
Interest payments: exemption notices
(1)
The Board may make regulations about exemption notices under section 93(5).
40
(2)
The provision that may be made by the regulations includes provision for or in
connection with any of the following—

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 6 — Exemption from income tax for certain interest and royalty payments
84

(a)
enabling an exemption notice to be issued only on the request of a
person of a prescribed description;
(b)
requiring a person requesting the issue of an exemption notice to certify
that Conditions 1 to 3 in section 93 are satisfied and that section 99 (anti-
avoidance) does not apply;
5
(c)
the information to be provided in the certificate;
(d)
the person to whom an exemption notice is to be given;
(e)
in a case where section 98 (special relationships) applies or may apply
to a payment of interest, an exemption notice to specify the amount of
the payment, or to specify the method to be used for determining the
10
amount of the payment, in relation to which the notice has effect;
(f)
imposing a time limit for the issue of an exemption notice;
(g)
imposing notification requirements;
(h)
the cancellation of exemption notices by the Board;
(i)
exemption notices to become ineffective in prescribed circumstances;
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(j)
the making of appeals (for example, against a refusal to grant, or the
cancellation of, an exemption notice);
(k)
authorising, in cases where—
(i)
an exemption notice has been issued,
(ii)
tax has not been deducted from a payment of interest, and
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(iii)
any of the Conditions in section 93 was not satisfied in the case
of the payment,

the recovery of that tax by assessment or by deduction from subsequent
payments.
Payment without deduction
25
96
Payment of royalties without deduction at source
(1)
Where—
(a)
section 349(1) of the Taxes Act 1988 (certain payments to be made
subject to deduction of income tax) applies to a payment of a royalty,
but
30
(b)
at the time the payment is made, the company making the payment
reasonably believes that section 93 applies to the payment,

the company may, if it thinks fit, make the payment without deduction of tax
under section 349(1).
(2)
But if section 93 does not in fact apply to the payment, section 350 of, and
35
Schedule 16 to, the Taxes Act 1988 (charge to tax where payments are made
under section 349 etc) are to have effect as if subsection (1) never applied in
relation to the payment.
(3)
If the Board are not satisfied that section 93 will apply to one or more payments
of royalties to be made by a company, they may direct the company that
40
subsection (1) is not to apply to the payment or payments.
(4)
A direction under subsection (3) may be varied or revoked by a subsequent
such direction.
(5)
If, before a payment of a royalty is made, the company beneficially entitled to
the income in respect of which the payment is to be made—
45
(a)
believed that section 93 would apply to the payment, but

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 6 — Exemption from income tax for certain interest and royalty payments
85

(b)
has subsequently become aware that any of Conditions 1 to 3 in section
93 has ceased to be satisfied,

it must without delay notify the Board and the company which is to make the
payment.
(6)
Paragraph 3(1) of Schedule 18 to the Finance Act 1998 (c. 36) (requirement to
5
make return in respect of information relevant to application of Corporation
Tax Acts) has effect as if the reference to the Corporation Tax Acts included a
reference to subsections (1) to (4) of this section.
(7)
Paragraph 20 of that Schedule (penalties for incorrect returns), in its
application to an error relating to information required in a return by virtue of
10
subsection (6), has effect as if—
(a)
the reference in sub-paragraph (1) to a tax-related penalty were a
reference to an amount not exceeding £3,000, and
(b)
sub-paragraphs (2) and (3) were omitted.
97
Claim for tax deducted at source from exempt interest or royalty payments
15
A claim for relief under section 93 in respect of a payment which is made
subject to deduction of tax under section 349 of the Taxes Act 1988 shall be
made to the Board.
Special relationships and anti-avoidance
98
Special relationships
20
(1)
In any case where—
(a)
apart from this section, section 93 would apply in relation to a payment
of interest or of a royalty,
(b)
at the time the payment is made, there is a special relationship (within
the meaning of Article 4(2) of the Directive) between the company in
25
Condition 1 of section 93 and the company in Condition 2 of section 93
or between one of those companies and another person, and
(c)
owing to the special relationship, the amount of the interest or royalty
paid exceeds the amount (“the arm’s length amount”) which would
have been paid in the absence of the relationship,
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this Chapter, apart from this section, has effect in relation to only so much of
the payment as does not exceed the arm’s length amount (which may be nil).
(2)
The following provisions of the Taxes Act 1988 apply in relation to subsection
(1) as if that subsection were a special relationship provision within the
meaning of those provisions—
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(a)
in the case of a payment of interest, subsections (2) to (4) of section 808A
(interest: special relationship), and
(b)
in the case of a payment of a royalty, subsections (2) to (7) and (9) of
section 808B (royalties: special relationship).
(3)
In those provisions of the Taxes Act 1988 as applied in relation to subsection
40
(1), expressions also used in this section or this Chapter have the same meaning
as in this section or this Chapter.

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 6 — Exemption from income tax for certain interest and royalty payments
86

(4)
This section does not affect any relief which may be allowed under any
arrangements having effect by virtue of section 788 of the Taxes Act 1988
(double taxation relief by agreement with other territories).
99
Anti-avoidance
(1)
Section 93 does not apply in relation to a payment of interest or of a royalty if—
5
(a)
in the case of a payment of interest, Condition A is satisfied, or
(b)
in the case of a payment of a royalty, Condition B is satisfied.
(2)
Condition A is satisfied if it was the main purpose or one of the main purposes
of any person concerned with the creation or assignment of the debt-claim in
respect of which the interest is paid to take advantage of this Chapter by means
10
of that creation or assignment.
(3)
Condition B is satisfied if it was the main purpose or one of the main purposes
of any person concerned with the creation or assignment of the right in respect
of which the royalty is paid to take advantage of this Chapter by means of that
creation or assignment.
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Supplementary
100
Consequential amendments
(1)
Section 98 of the Taxes Management Act 1970 (c. 9) (special returns etc) is
amended as follows.
(2)
In subsection (4A)(b), after “(4D)” insert “, (4DA)”.
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(3)
After subsection (4D) insert—
“(4DA)
A payment is within this subsection if—
(a)
it is a payment to which section 349(1) of the principal Act
(requirement to deduct tax) applies,
(b)
a company, purporting to rely on section 96 of the Finance Act
25
2004 (payment of royalties without deduction at source), makes
the payment without deduction of tax under section 349(1) of
the principal Act, and
(c)
at the time the payment is made section 93 of the Finance Act
2004 does not apply to the payment and the company—
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(i)
does not believe that that section does so apply, or
(ii)
if it does so believe, cannot reasonably do so.”.
(4)
In section 18 of the Taxes Act 1988 (Schedule D) after subsection (5) insert—
“(6)
This section is subject to Chapter 6 of Part 3 of the Finance Act 2004
(exemption from income tax for certain interest and royalty
35
payments).”.
(5)
In section 349 of the Taxes Act 1988 (certain payments to be made subject to
deduction of income tax) after subsection (6) insert—
“(7)
This section is subject to Chapter 6 of Part 3 of the Finance Act 2004
(exemption from income tax for certain interest and royalty
40
payments).”.