In the UK, dividends are paid without deduction of any withholding tax (WHT) but can only be paid if the company has sufficient distributable reserves.
Final dividends are usually recommended by the directors for the shareholders to approve. Once approved, the company is obliged to pay the final dividend, either immediately or, if the shareholders’ resolution so provides, on a future date. Interim dividends may be paid at any time and are usually decided solely by the directors.
The directors will need to have regard to the company’s future financial needs and events that have taken place since the last accounts were prepared. They may be personally liable if a dividend is paid when a company is insolvent.
Dividends are not tax deductible when computing the taxable profits of the paying company.
Withholding taxes on interest and royalties
The standard rate of WHT is 20%, but it can be reduced under a treaty claim. However, there are transfer pricing issues to consider.
An application for the treaty rate to apply to interest must be made by the recipient to HM Revenue and Customs (HMRC) and the payer should wait to receive a direction from HMRC. HMRC may address the arm’s length nature of the loan if it is to a connected party, in respect of debt quantum, interest rate and interest cover.
The treaty rate can be applied to royalties without a direction from HMRC if, at the time of paying the royalty, the company reasonably believes that the recipient is entitled to the treaty rate. If the royalty is paid to a connected party, it should be arm’s length and the UK payer should receive a benefit from paying it. In some cases, payments characterised as “royalties” may not be and therefore withholding tax would not be in point following a detailed tax analysis. A dual UK tax and transfer pricing analysis is recommended prior to implementation.
The UK legislation that incorporated the EU Interest and Royalties Directive allowing interest and royalties to be paid without WHT in certain circumstances no longer applies from 1 June 2021.
Reduced rates of WHT only apply to arm’s length rates. Excess amounts paid will be subject to WHT at 20% and deductibility may be restricted under transfer pricing legislation. Limitation of benefit clauses may also restrict availability of treaty rates. Tax relief for the paying company may be restricted under the corporate interest restriction, which applies to individual companies or groups of companies that have a net interest expense over GBP2m in a 12-month period.
WHT cannot be offset against the paying company’s corporation tax liability.
The recipient’s tax position should also be borne in mind when deciding on the most tax efficient way to repatriate profits.
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Date: March 2021