Withholding Tax Post Brexit | UK and EU

FREQUENTLY ASKED BUSINESS QUESTION

I heard there are changes to how interest is paid between EU group companies following Brexit, regarding Withholding Tax (WHT).

Can you advise what I should consider when interest is paid between my UK and Irish companies?

TAX TIP

It would be common practice for a group of companies to lend funds to each other as needed and charge interest accordingly. Prior to Brexit, the interest could be paid between EU companies without any Withholding Tax (WHT) as they benefited from the exemptions under EU law, specifically the interest and royalties directive.

As a result of Brexit and the end of the transition period, from Tuesday 1st June 2021, any UK company making interest payments to EU companies is required to deduct 20% WHT and report to HM Revenue & Customs (HMRC) via a quarterly CT61 return. The CT61 return must be requested from HMRC and is due for filing 14 days after the end of the return period. There are initially four period ends:

• 31st March
• 30th June
• 30th September
• 31st December

However, you may have a fifth return if your Financial Statements are prepared to another date.

Reliefs for Withholding Tax (WHT)

Fortunately, there are reliefs for Withholding Tax (WHT) provided by the UK tax treaties with other jurisdictions which may reduce the WHT rate percentage.

However, the tax treaty rate does not automatically apply as there are conditions, meaning that the parties to the arrangement must make a claim. The claim should be made in advance of any interest payments, sometimes as early as six months since part of the process requires government authorities to certify the company’s residence.

In particular, the UK-Ireland Tax Treaty reduces the WHT rate to 0%. To avoid Withholding Tax (WHT) on interest payable to an Irish company, the Irish company must apply to HMRC under the Double Taxation Treaty Passport (DTTP) scheme. HMRC will consider the application within 30 days, if accepted they will advise via a letter and allocate a unique double taxation treaty passport reference number. HMRC maintains a public DTTP scheme register which will show the company’s details, this will help the borrower verify a passport holder’s status before making interest payment without deducting WHT. However, the lender must notify HMRC of the loan with the DTTP holder via DTTP 2 form.

In the event of the above not being in place prior to interest being paid, 20% WHT should be deducted from the interest payment. The Irish lender company can apply to UK’s HMRC to claim a refund of the WHT deducted.

Likewise, if a UK company is receiving interest from an irish company, the UK company must complete the relevant form from the Revenue Commissioners website and send it to HMRC to certify that the company is a UK tax resident prior to interest being paid for the treaty rate of 0% to apply.

Withholding Tax | Other Considerations

The UK has one of the most extensive double tax treaty networks in the world, but not all treaties are the same. Therefore, should you have a loan relationship with a company resident elsewhere in the EU, you would need to refer to the tax treaty with that country to understand the WHT treaty rate.

Other tax considerations for group interest would include: –

• Transfer Pricing – is interest charged at an “arm’s length” basis?
• Thin Capitalisation – is the company being funded by overseas loans rather than equity?
• Corporate Interest Restriction – does the UK group interest charge exceed £2million?

Here to Help

The team at FPM are here to help with all your finance and tax queries. If you need assistance on interest deductibility and whether Withholding Tax applies, contact our Tax Team.