Offshore Royalty Payments

Mon 29 Oct 2018

The Government will apply income tax to offshore businesses making offshore royalty payments in respect of intangible property used to generate UK sales. This will apply from 6 April 2019. The charge will apply unless the entity is UK resident or tax resident in a jurisdiction with which the UK has a double tax treaty with a non-discrimination article.

Rather than extend the scope of the existing withholding tax régime on such payments, the Government has chosen to impose an income tax charge on certain low-tax offshore entities. The new tax will be payable on the gross income generated from UK sales in respect of the exploitation of intangible property.  It will also cover sales of intellectual property derived from UK sales.  The measure will include within its scope the indirect but substantial exploitation of intangible property in the UK by unrelated parties (those with a less than 25% relationship with the business being considered).

There will be a £10m de minimis UK sales threshold.  Income from IP acquired from unrelated parties, where the business undertakes all (or substantially all) of its activities in a low tax jurisdiction will also be excluded.

It will come into effect from 6 April 2019 with anti-forestalling from 29 October 2018.  There will be joint & several liability for the tax, based on a targeted control test (those 51% companies consolidated in the same group for accounting purposes) for entities connected with the offshore entity.  There will be no double tax relief for any foreign taxes suffered, but there will be for any UK taxes already suffered.

Offshore businesses with UK activity should be examining their business models and assessing whether they are caught and how they will manage any compliance requirements.