»Ê¹ÚÌåÓýapp

FA16/S42(7) brings arrangements that seek to achieve a foreign DTA advantage within the scope of S917A. This ensures that arrangements entered into with a main purpose of obtaining a tax advantage using the DTA between two non-UK countries does not prevent the UK from retaining taxing rights on royalty payments made in connection with a UK PE.

Example

»Ê¹ÚÌåÓýapp group holding company, HCo, licences the right to use and exploit its intellectual property to another group company resident in Country B - ‘Company Bâ€�. Company B sub-licences these rights to Company A to exploit in conducting its business. »Ê¹ÚÌåÓýapp licence between HCo and Company B and the sub-licence from Company B to Company A were put in place for the purpose of ensuring that Company A did not have to withhold tax in Country A on the payment of the royalty that ultimately ends up in HCo. »Ê¹ÚÌåÓýapp UK does not have a DTA with the country in which HCo is resident.

An enquiry into the affairs of Company A has shown that it has a dependent agent permanent establishment in the UK. »Ê¹ÚÌåÓýapp royalty payment from Company B to HCo is connected to the trade carried on through the UK PE.

»Ê¹ÚÌåÓýapp royalty is being paid from Company A to Company B. As such, absent any other considerations, Company B would be entitled to the benefit of the DTA between Country B and the UK which provides for royalties to be taxable only in the state of residence of the beneficial owner. »Ê¹ÚÌåÓýapp arrangement under which the royalties were paid was put in place to obtain the benefit of the DTA between Country A and Country B. As such, ITA07/S917A would not normally apply to prevent the obligation to deduct income tax from the royalty payment from being switched-off by the DTA between Country B and the UK.

FA16/S42(7) provides that where it is reasonable to conclude that an arrangement was put in place with a main purpose of obtaining a benefit under the DTA between Country A and Country B, those arrangements will be considered for the purposes of 917A to be “DTA tax avoidance arrangementsâ€�. »Ê¹ÚÌåÓýapprefore, in this example S917A would provide that the obligation to deduct tax from the royalty with a UK source will not be affected by the provisions of the DTA between Country B and the UK.