What is Withholding Tax?

When transacting across different countries, you are likely to make deductions to meet the tax requirements of the originating country. Withholding tax is a tax levied by overseas governments on income received by non-residents, such as:

• Business profits
• Dividends
• Interest
• Capital gains

Navigating the rates and requirements can be a minefield but fortunately, the UK has a wide range of double tax treaties which can ease this burden.

UK tax residents receiving income from certain countries may be entitled to double tax relief. This often applies when the UK has a double tax treaty with that country. If no such treaty exists, unilateral relief may be available.

When an individual or company receives treaty relief or unilateral relief, they obtain a tax credit. This credit offsets the UK tax liability, equal to the amount of tax they’ve already paid under foreign law on the same income. The relief available will be the lower of the tax payable in the UK or the tax suffered overseas. Similar tests apply to capital gains tax.

Treaty Relief

Treaty relief takes precedence over other forms of relief for foreign taxes. In order to claim treaty relief, the taxpayer must have been resident in the UK throughout the chargeable period. The individual/company would need to provide a certificate of residency to prove their UK tax residence status and will mean no withholding tax should be applied.

Unilateral Relief

Unilateral relief is beneficial when the UK does not have a double tax treaty with the jurisdiction in question.

In order to benefit from unilateral relief, the tax must be a tax on income which corresponds to the tax which would be payable in the UK. Furthermore, profits must arise where the operations take place, which is often where companies/individuals fall short.  The overall effect of these rules may mean that there are substantial unusable foreign tax credits. Where this is the case, deduction relief should be considered.

Deduction Relief

This method allows an individual/company to deduct the foreign tax paid as a business expense when computing the profits of the business.

Deduction relief can be beneficial in certain situations. It’s often preferred when a company or individual is making losses. It’s also useful when other reliefs, like capital allowances, cover taxable profits.

Withholding tax on UK payments

It is also a requirement for UK businesses to withhold tax on interest and royalties.

Interest

In most circumstances, tax at the basic rate of 20% must be withheld from certain UK interest which is paid to a company or individual resident outside the UK.

The UK withholding tax arises if:

• The interest has a source in the UK
• It is a yearly interest
• It is actually paid

The recent case law (Hargreaves Property Holdings Ltd v HMRC) has reaffirmed certain best practice points. These points pertain to withholding from yearly interest payments. The law should focus on the commercial substance of transactions, not their strict legal form.

Royalties

The general rule mandates withholding tax at the basic rate of 20% from certain intellectual property payments, including the following:

• royalties and other sums paid in respect of the use of patents
• qualifying annual payments
• payments in respect of relevant intellectual property made to a person whose place of usual abode is outside the UK

In both interest and royalty situations, certain circumstances may render withholding tax inapplicable under the double tax treaty. Each case should undergo individual consideration.

Advanced planning

If you anticipate receiving payment from a non-UK source or customer, it’s wise to proactively apply for a certificate of residency from HMRC. Possessing this proof of your tax residency can eliminate the need for withholding tax applications, potentially resulting in faster payments.

In conclusion, moving money out of the UK banking system requires careful planning and expert advice. Options like direct bank transfers or using FX brokers present unique advantages and potential risks. Tax implications, currency stability, and pension considerations all play pivotal roles. Hence, seeking professional financial and tax advice is highly recommended to navigate this complex process successfully.

For further advice on tax-efficient business transactions or sales, please get in touch with a member of our business tax team at 01903 234094.