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

90

 

   

the recovery of that tax by assessment or by deduction from subsequent

payments.

Payment without deduction

101     

Payment of royalties without deduction at source

(1)   

Where—

5

(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

(b)   

at the time the payment is made, the company making the payment

reasonably believes that section 98 applies to the payment,

10

   

the company may, if it thinks fit, make the payment without deduction of tax

under section 349(1).

(2)   

But if section 98 does not in fact apply to the payment, section 350 of, and

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

15

relation to the payment.

(3)   

If the Board are not satisfied that section 98 will apply to one or more payments

of royalties to be made by a company, they may direct the company that

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

20

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—

(a)   

believed that section 98 would apply to the payment, but

(b)   

has subsequently become aware that any of Conditions 1 to 3 in section

25

98 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

make return in respect of information relevant to application of Corporation

30

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

subsection (6), has effect as if—

35

(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.

102     

Claim for tax deducted at source from exempt interest or royalty payments

A claim for relief under section 98 in respect of a payment which is made

40

subject to deduction of tax under section 349 of the Taxes Act 1988 shall be

made to the Board.

 

 

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

91

 

Special relationships and anti-avoidance

103     

Special relationships

(1)   

In any case where—

(a)   

apart from this section, section 98 would apply in relation to a payment

of interest or of a royalty,

5

(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

Condition 1 of section 98 and the company in Condition 2 of that

section or between one of those companies and another person, and

(c)   

owing to the special relationship, the amount of the interest or royalty

10

paid exceeds the amount (“the arm’s length amount”) which would

have been paid in the absence of the relationship,

   

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

15

(1) as if that subsection were a special relationship provision within the

meaning of those provisions—

(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

20

section 808B (royalties: special relationship).

(3)   

In those provisions of the Taxes Act 1988 as applied in relation to subsection

(1), expressions also used in this section or this Chapter have the same meaning

as in this section or this Chapter.

(4)   

This section does not affect any relief which may be allowed under any

25

arrangements having effect by virtue of section 788 of the Taxes Act 1988

(double taxation relief by agreement with other territories).

104     

Anti-avoidance

(1)   

Section 98 does not apply in relation to a payment of interest or of a royalty if—

(a)   

in the case of a payment of interest, Condition A is satisfied, or

30

(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

of that creation or assignment.

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(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.

 

 

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

92

 

Supplementary

105     

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)”.

5

(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 101 of the Finance Act

10

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 98 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

20

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

25

payments).”.

106     

Transitional provision

(1)   

This section has effect only in relation to—

(a)   

payments of interest made on or after 1st January 2004 but before the

coming into force of the first regulations under section 100, and

30

(b)   

payments of royalties made on or after 1st January 2004 but before the

passing of this Act.

(2)   

Anything done by a person—

(a)   

before 8th April 2004, and

(b)   

in reliance on, and in accordance with, a provision of the published

35

draft Chapter or the published draft regulations,

   

is to be treated as if it had been done under, and in accordance with, the

corresponding provision of this Chapter or of regulations under section 100.

(3)   

Anything done by a person—

(a)   

on or after 8th April 2004 but before the passing of this Act, and

40

(b)   

in reliance on, and in accordance with, a provision of the published

Chapter or the published regulations,

 

 

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 7 — Savings income: double taxation arising from withholding tax

93

 

   

is to be treated as if it had been done under, and in accordance with, the

corresponding provision of this Chapter or of regulations under section 100.

(4)   

During the period between the passing of this Act and the coming into force of

the first regulations under section 100, the published regulations shall have

effect as if they were regulations under that section.

5

(5)   

In this section—

   

“the published draft Chapter” means the draft version of this Chapter

published by the Board on 10th December 2003;

   

“the published draft regulations” means the draft version of regulations

under section 100 published by the Board on 10th December 2003;

10

   

“the published Chapter” means the version of this Chapter appearing in

the Finance Bill as introduced in the House of Commons and published

on 8th April 2004;

   

“the published regulations” means the draft version of regulations under

section 100 published by the Board on 8th April 2004.

15

Chapter 7

Savings income: double taxation arising from withholding tax

Introductory

107     

Introductory

(1)   

This Chapter has effect for the purpose of giving relief from double taxation in

20

respect of special withholding tax.

(2)   

Such relief is given—

(a)   

by set-off against income tax or capital gains tax;

(b)   

to the extent that it cannot be so set off, by repayment.

(3)   

“Special withholding tax” means a withholding tax (however described) levied

25

under the law of a territory outside the United Kingdom implementing—

(a)   

in the case of a member State, Article 11 of Council Directive 2003/48/

EC of 3rd June 2003 on taxation of savings income in the form of interest

payments (“the Savings Directive”), or

(b)   

in the case of a territory other than a member State, any corresponding

30

provision of international arrangements (whatever the period for

which the provision is to have effect).

(4)   

“International arrangements”, in relation to a territory, means arrangements

made in relation to that territory with a view to ensuring the effective taxation

of savings income under—

35

(a)   

the law of the United Kingdom, or

(b)   

that law and the law of that territory.

(5)   

For the purposes of Part 18 of the Taxes Act 1988 (double taxation relief)—

(a)   

relief from double taxation in respect of special withholding tax is not

to be available under Chapters 1 and 2 of that Part; and

40

(b)   

special withholding tax is not to be regarded as foreign tax for the

purposes of Chapter 2 of that Part.

 

 

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 7 — Savings income: double taxation arising from withholding tax

94

 

(6)   

Sections 113 and 114 also make provision for implementing—

(a)   

Article 13(2) of the Savings Directive (provision of certificate to avoid

levy of special withholding tax), and

(b)   

any corresponding provision of international arrangements.

(7)   

In this Chapter—

5

   

“double taxation arrangements” means arrangements having effect by

virtue of section 788 of the Taxes Act 1988 (double taxation relief by

agreement with other territories);

   

“international arrangements” has the meaning given by subsection (4);

   

“the Savings Directive” has the meaning given by subsection (3)(a);

10

   

“savings income”—

(a)   

in the case of special withholding tax levied under the law of a

member State, has the same meaning as the expression “interest

payment” has for the purposes of the Savings Directive (see

Articles 6 and 15 of the Directive), and

15

(b)   

in the case of special withholding tax levied under the law of a

territory other than a member State, has the same meaning as

the corresponding expression has for the purposes of the

international arrangements concerned;

   

“special withholding tax” has the meaning given by subsection (3).

20

(8)   

In the application of this Chapter in relation to capital gains tax, expressions

used in this Chapter and in the Taxation of Chargeable Gains Act 1992 (c. 12)

have the same meaning in this Chapter as in that Act.

Credit etc for special withholding tax

108     

Income tax credit etc for special withholding tax

25

(1)   

This section applies where—

(a)   

a person is chargeable to income tax for a year of assessment in respect

of a payment of savings income or would be so chargeable but for any

exemption or relief which has effect in respect of that payment,

(b)   

special withholding tax is levied in respect of the payment, and

30

(c)   

the person is resident in the United Kingdom for that year of

assessment.

(2)   

On the making of a claim, income tax (“the deemed tax”) of an amount equal

to the amount of the special withholding tax levied is to be treated as having

been—

35

(a)   

paid by or on behalf of the person for that year of assessment, and

(b)   

deducted at source for that year of assessment for the purposes of the

provisions in subsection (3).

(3)   

The provisions are—

   

section 7 of the Taxes Management Act 1970 (c. 9) (notice of liability to

40

income tax and capital gains tax);

   

section 8 of that Act (personal return);

   

section 8A of that Act (trustee’s return);

   

section 9 of that Act (returns to include self-assessment);

   

section 59A of that Act (payments on account of income tax);

45

 

 

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 7 — Savings income: double taxation arising from withholding tax

95

 

   

section 59B of that Act (payments of income tax and capital gains tax);

   

section 824(3) of the Taxes Act 1988 (repayment supplements:

determination of relevant time).

(4)   

Where the amount of the deemed tax exceeds the amount (which may be nil)

of income tax for which the person is liable for the year of assessment (before

5

any set-off for the deemed tax), then, to the extent that it would not otherwise

be the case,—

(a)   

the excess is to be set against any capital gains tax for which he is liable

for the year of assessment, and

(b)   

he is entitled to a repayment of income tax in respect of any remaining

10

balance of that excess.

(5)   

But subsection (2) does not apply in relation to an amount of special

withholding tax levied if—

(a)   

the person has obtained relief from double taxation in respect of that

special withholding tax under the law of a territory outside the United

15

Kingdom, and

(b)   

the person was resident in that territory, or was treated as being so

resident under any double taxation arrangements, in the year of

assessment in question.

109     

Capital gains tax credit etc for special withholding tax

20

(1)   

This section applies where—

(a)   

a person makes a disposal of assets in a year of assessment,

(b)   

on the assumption that a chargeable gain were to accrue on the

disposal,—

(i)   

it would accrue to the person, and

25

(ii)   

he would be chargeable to capital gains tax in respect of it,

(c)   

the consideration for the disposal consists of or includes an amount of

savings income,

(d)   

special withholding tax is levied in respect of the whole or any part of

the consideration for the disposal, and

30

(e)   

the person is resident in the United Kingdom for that year of

assessment.

(2)   

For the purposes of subsection (1)(b)(ii), there are to be disregarded—

(a)   

any deductions that fall to be made from the total amount referred to in

section 2(2) of the Taxation of Chargeable Gains Act 1992 (c. 12)

35

(deductions for allowable losses),

(b)   

section 3 of that Act (annual exempt amount), and

(c)   

section 77(1) of that Act (settlor with interest in settlement: trustees not

to be chargeable in certain circumstances).

(3)   

On the making of a claim, capital gains tax (“the deemed tax”) of an amount

40

equal to the amount of the special withholding tax levied is to be treated as

having been paid—

(a)   

by or on behalf of the person for that year of assessment, and

(b)   

for the purposes of section 283(2) of the Taxation of Chargeable Gains

Act 1992 (repayment supplements: determination of relevant time), on

45

31st January next following that year of assessment.

 

 

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 7 — Savings income: double taxation arising from withholding tax

96

 

(4)   

For the purposes of the application of the following provisions in relation to the

person for that year of assessment, references in those provisions to income tax

deducted at source for that year of assessment are to be taken to include the

amount of the deemed tax—

   

section 7 of the Taxes Management Act 1970 (c. 9) (notice of liability to

5

income tax and capital gains tax);

   

section 8 of that Act (personal return);

   

section 8A of that Act (trustee’s return);

   

section 9 of that Act (returns to include self-assessment);

   

section 59B of that Act (payments of income tax and capital gains tax).

10

(5)   

Where the amount of the deemed tax exceeds the amount (which may be nil)

of capital gains tax for which the person is liable for the year of assessment

(before any set-off for the deemed tax), then, to the extent that it would not

otherwise be the case,—

(a)   

the excess is to be set against any income tax for which he is liable for

15

the year of assessment, and

(b)   

he is entitled to a repayment of capital gains tax in respect of any

remaining balance of that excess.

(6)   

But subsection (3) does not apply in relation to an amount of special

withholding tax levied if—

20

(a)   

the person has obtained relief from double taxation in respect of that

special withholding tax under the law of a territory outside the United

Kingdom, and

(b)   

he was resident in that territory, or was treated as being so resident

under any double taxation arrangements, in the year of assessment in

25

question.

(7)   

To the extent that section 108 of this Act applies in relation to an amount of

special withholding tax levied (or would so apply on the making of a claim),

this section does not apply in relation to that amount.

110     

Credit under Part 18 of Taxes Act 1988 to be allowed first

30

(1)   

Any credit for foreign tax that falls to be allowed under Chapters 1 and 2 of Part

18 of the Taxes Act 1988 (double taxation relief) against income tax or capital

gains tax is to be so allowed before effect is given to section 108 or 109.

(2)   

In this section “foreign tax” has the same meaning as in Chapter 2 of Part 18 of

the Taxes Act 1988 (see section 792(1) of that Act).

35

Computation of income etc

111     

Computation of income etc subject to special withholding tax only

(1)   

This section applies where—

(a)   

a person is chargeable to income tax in respect of a payment of savings

income, or

40

(b)   

a chargeable gain accrues to a person on a disposal by him of assets in

circumstances where the consideration for the disposal consists of or

includes an amount of savings income,

   

and the conditions in subsections (2) and (3) are satisfied.

 

 

 
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