Business

Tax Corner: Withholding tax on interest payments to EU following Brexit

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QUESTION: I heard there are changes to how interest is paid between EU Group Companies following Brexit, can you advise what I should consider when interest is paid between my UK and Irish companies?

ANSWER: 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 June 1 any UK company making interest payments to EU companies is required to deduct 20 per cent 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 periods. There are initially four period ends, March 31, June 30, September 30 and December 31, though you may have a fifth return if your financial statements are prepared to another date.

Fortunately, there are reliefs for 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 in advance 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 per cent. To avoid withholding tax on interest payable to an Irish company, the 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 maintain 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.

However, in the event of the above not being in place prior to interest being paid, 20 per cent 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 Revenue Commissioners website and send to HM Revenue and Customs to certify that the company is UK Tax resident prior to interest being paid for the treaty rate of 0% to apply.

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 £2 million?

Your company’s tax adviser will be able to advise on interest deductibility and whether WHT applies.

KellyAnne Murtagh (k.murtagh@pkffpm.com) is senior manager at PKF-FPM (www.pkffpm. com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.