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UK incorporated companies are very useful tools to exploit Intellectual Property owned by entities in low tax or no tax jurisdictions.

The UK only imposes withholding tax on three types of royalties shown below, but in no case are withholding taxes imposed on Royalties with a foreign source.

Copyright Royalties

UK withholding tax is only incurred by UK companies in relation to UK copyright and design. No withholding tax is applied to the UK company if the payments relate to non-UK copyright. Hence, if a UK company acquires rights to a foreign publication, it may receive royalty payments with the benefit of the applicable Double Tax Treaty and it may make onward payment to a third country without suffering UK withholding tax. The receiving third country may be an offshore territory with which the UK has no Double Tax Treaty.

Additionally, no UK withholding tax can be applied to payments in relation to film or video rights even if the copyright is UK, rather than foreign.

Patent Royalties

Broadly, the situation here is much the same as above. Withholding tax can only be applied to the UK company if the royalty payments relate to a UK patent.

Annual Payments

UK withholding tax may be applied to "annual payments" or income considered as "pure income profits". However, as above, UK withholding tax cannot be applied if the payments are foreign source.

To give payments from a UK resident company a foreign source character they should be paid out of income which the UK company has derived from overseas. This foreign income should have been paid into an overseas bank account of the UK company with the onward payments by the UK company made from such an account without the funds being remitted to the UK.

Structure

The management and control of the UK company should be conducted outside the UK, perhaps in an offshore centre such as the Isle of Man. This gives additional support to the treatment of such payments as having a wholly foreign source rather than a UK source, and therefore outside the scope of UK withholding tax.

If the UK company receiving royalty payments is to be managed from an offshore territory, that territory must be one which does not have a Double Taxation Treaty with the UK containing a clause that would cause the UK company to be treated as tax resident in the offshore centre.

 
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