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UK companies can be used to receive overseas royalties tax efficiently. The mainstream UK corporation tax rate (also applicable to international royalty income) is now an attractive 20% and this nominal rate will fall to 19% on April 6th 2017. However, as illustrated below, the effective rates of UK corporation tax can fall well below 20%.
UK companies can be tax-efficient vehicles for the licensing of IP.
Whilst in the example the UK company will be fully liable to UK corporation tax on the receipt of non-UK royalties, the licence fee it must pay to the offshore company which owns and licences the IP will be deductible for UK corporation tax purposes.
The UK company's own licence fee must conform to the arm's length principle, particularly if the UK company and the offshore company are related parties.
The UK company can use the UK double tax treaty network, or the EU Interest and Royalties Directive to mitigate or eliminate foreign withholding taxes on its royalty receipts from the non-UK company provided the non-UK payer of the royalty is registered or resident in a country with a double tax treaty with the UK, or the non-UK payer of the royalty is resident in an EU member state.
Whilst the UK company's licence fee is UK-tax deductible, it needs to be considered if UK withholding tax applies to the royalty payments. Fortunately the scope of UK withholding tax applicable to royalties paid by a UK company to a non-UK resident company is not as wide as might be expected.
Even if UK withholding tax is applicable, this liability can be mitigated or eliminated through the use of offshore companies located either in the EU (e.g. Cyprus) or in a country with a double tax treaty with the UK.
Furthermore with appropriate planning, the source of the UK company's licence fees will be a non UK source, thus precluding UK withholding tax.
This sort of international tax planning needs to be considered and reviewed in light of the OECD's Base Erosion and Profit Shifting project (BEPS) which will introduce substance and ownership requirements for the UK company and the offshore company in this example.
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