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New UK tax on offshore IP receipts now in force

  • United Kingdom
  • Intellectual property
  • Tax planning and consultancy
  • Technology, Media and Telecoms

10-04-2019

With effect from the 6 April 2019, revenue earned by offshore companies from intangible property used to generate UK sales will be subject to UK income tax. Such offshore companies will be required to self-assess and pay to the UK Revenue any such liability and if they do not, any group company can be held jointly and severally liable for such tax.

For companies and groups within the scope of this tax, alongside any tax costs there will also potentially be issues of double taxation, questions of available tax credits and significant administrative burden associated with calculating the UK taxable amounts. More detailed HMRC guidance on this new tax is expected this month (April 2019) but the core principles of this new tax are summarised below.

What is the objective of this new tax? 

This tax charge targets multinational groups which hold intangible property in low tax offshore jurisdictions and use that intangible property to generate income from sales to the UK, whether directly or through third parties.

Who will fall within the scope of this new tax?

Non-UK companies (or individuals) who are resident in jurisdictions which do not have a full treaty with the UK (a “full treaty” meaning a double tax treaty with the UK containing a non-discrimination provision).

When will a tax charge arise?

This new UK tax is chargeable on:

• the gross amounts (rather than profit, and whether of a revenue or capital nature)

• received by a non-UK resident entity within in the scope of the tax

• in respect of the use or enjoyment of intangible property by another party

• where such use and enjoyment has enabled, facilitated or promoted sales in the UK (directly or indirectly)

For example: intangible property (such as know-how, distribution rights or customer lists) held by an IP Co in Country A is licenced to a Sales Co in Country B (neither being the UK), and Sales Co uses this IP to manufacture goods and make direct sales to UK customers. The new UK income tax would apply to the license fee earned by IP Co.

What is meant by intangible property?

Intangible property is defined by exclusion, with obvious “tangible” property being excluded. The result is a very wide definition of intangible property including trademarks, distribution rights, know-how, marketing and software intangibles, customer lists and embedded royalties.

What is the applicable tax rate?

UK income tax at the current rate of 20% would be applicable to relevant revenues of the non-UK company.

What is the scope of direct or indirect use and enjoyment?

The scope is very wide and this tax can arise in relation to indirect chains of use and enjoyment through multiple persons (connected or unconnected) that result in UK sales.

For example: in the scenario above assume that Sales Co sells the goods to unconnected company Retailer Co in Country C (also not the UK) and then Retailer Co makes direct sales to the UK. The new UK income tax could still apply to the license fee earned by IP Co.

The examples in the UK Government’s response to the consultation on this tax charge suggest that the intention is to cover UK sales made by unrelated parties only where:

• a substantial part of the value of the end product or service sold to UK customers is derived from the use of the non-UK resident’s intangible property

• the exploitation of the intangible property relates to a non-substitutional component of the end product

However, the legislation is not limited in this way so it is hoped that the anticipated HMRC guidance will have more detail on this area.

What if the relevant intangible property is used to makes sales to both the UK and other countries?

In this case, the relevant non-UK company will be required to make a just and reasonable apportionment of the income that it receives that is referable to UK sales.

Are there any exemptions?

Yes, there are three exemptions:

Limited UK Sales exemption

This exemption applies where receipts generated by the non-UK resident and its connected persons do not exceed £10 million a year. This is intended to prevent the charge applying to groups that do not have UK taxable presence and / or are too small to reasonably be expected to be aware of these regulations.

Relevant activity undertaken in territory of residence exemption

This exemption applies where substantially all of the relevant activity in relation to the intangible property is undertaken in the territory in which the non-UK person is resident and the non-UK person has not acquired the intangible property from a related party. Relevant activity includes creating, developing and maintaining the intangible property. This exemption may be of limited value to a multinational business given relevant activity in respect of the intangible property is likely to be undertaken in multiple countries worldwide.

Foreign tax exemption

This exemption applies where the relevant non-UK company pays tax in its jurisdiction of at least half of what the UK charge to income tax would have been. This exemption may prove to be the least useful in practice for the following reasons:

• this exemption potentially compares a UK tax on gross income with a local tax on profits

• the exemption does not take into account taxes paid by other members of the group, for example if the parent company is subject to controlled foreign company rules

When does this tax charge apply from?

6 April 2019.

However, a specific anti-avoidance measure has been effective since 29 October 2018 which targets arrangements designed to avoid the charge, including arrangements which involve transferring the intangible property to another group entity resident in a full treaty jurisdiction.

Who pays the tax?

This new tax is the primary liability of the relevant non-UK IP holding company and should be accounted for by way of the UK self-assessment system. This will require applicable taxpayers to complete and submit a SA700 tax return and pay the tax due by 31 January following the end of the tax year in which the relevant revenue arose (the UK income tax year runs from 6 April – 5 April).

However, if the tax remains unpaid for six months after the payable date by the non-UK resident who is primarily liable, HMRC may serve a notice on any person in the same group making them joint and severally liable.

What should businesses be doing?

This new tax is now in force so businesses with offshore IP holding company structures should be carefully considering the impact of this legislation. This should include assessing the tax payment and filing obligations of such offshore companies, the impact for other non-UK tax purposes (e.g. would this tax be creditable for US CFC taxation purposes) and whether it would be appropriate to restructure arrangements.

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