My VIP Tax Team question of the week: Withholding tax on royalties from India

Q. My client, a UK trading company with no presence or permanent establishment in India, has received royalties from India for many years, with a withholding tax rate of around 10.8% which we are able to claim as foreign tax credit in the UK. We are now being told that the withholding tax will be increased to just over 20% unless we produce a certificate of residency and register in India. Do we need to do this and what will be the effect?

A.) Yes, you will need to provide a certificate of residency, plus any other forms and compliance requested by the India authorities in order to be taxed at the rate of withholding tax agreed within the UK-India double tax treaty, which is currently 15%.

If you do not make these arrangements, then even though the Indian authorities will withhold 20%, any amount above 15% will not be available for relief in the UK either by way of tax credit or deduction. Under s33 TIOPA 2010, there is a duty to minimise the foreign tax paid. Failure to claim double tax treaty relief because of the level of compliance or paperwork required, would not satisfy this requirement.

Before 1 April 2023, India had domestic legislation in place which provided a favourable withholding tax rate of c.10% that was available to companies outside India. Therefore, most companies would have taken advantage of this. However, since the law changed within the Indian Finance Bill 2023, with effect from 1 April 2023, this rate was increased to c.20%.

Article 13(2) (ii) confirms that a treaty rate of 15% is available. The double tax treaty came into force in 1994, therefore the rates in 13(2)(i) are no longer relevant.
13(2) However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed:

(ii)during subsequent years, 15 per cent of the gross amount of such royalties or fees for technical services; and
To apply for a certificate of residence the company will need to complete the form via the Res1 online service on the Government gateway.

HMRC has information on what information will be needed to apply for a certificate here and more detailed guidance within the International manual.

If the income is part of the company’s trading income, then the company will need to work out the UK corporation tax due on that source of income and compare it with the foreign tax withheld. Relief for foreign tax cannot exceed the corporation tax due on that same income. HMRC guidance on this process is available at INTM168010. There is specific guidance with regards royalties at INTM168060.

Finally, foreign tax credit relief will be available as a credit against the corporation payable by the company under s.44 TIOPA 2010. It cannot generate or increase a loss. As such, if the company is making a loss, it may be worth considering making a claim for relief by way of deduction as an expense under s27 and s112 TIOPA 2010.

The Croner-i library has a very useful in-depth section, available to subscribers here.

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Tax Adviser
0844 892 2470

Amaira has been working in boutique tax planning and advisory firms since 2010, gaining experience in a variety of tax sectors relating to owner managed business and individuals. Recently dealing with developments around the Disguised Remuneration legislation, she also has experience of dealing with HMRC enquiries and settlements.

Amaira has a legal background, having completed the Bar Vocational Course, and is studying toward her Association of Taxation Technicians qualifications.

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