Interest, Royalties, Services and Other Cross-Border Payments
UK companies frequently make payments to overseas companies for services, financing, intellectual property and other business activities.
For foreign-owned UK subsidiaries, this can include payments to an overseas parent company or another group entity for intercompany interest, royalties, management services and other costs.
Not every payment to an overseas company is subject to UK withholding tax. However, certain types of UK-source payments can trigger a withholding obligation, and the rules can be affected by the recipient’s country of residence and any applicable Double Taxation Agreement (DTA).
Understanding the rules before making a payment is important. If UK tax should have been deducted but was not, the UK company may become responsible for the tax, together with potential interest and penalties.
This guide explains the key UK withholding tax considerations for companies making payments to overseas businesses.
What Is UK Withholding Tax?
UK withholding tax is a mechanism under which the UK payer deducts tax from certain payments before paying the overseas recipient.
The UK company then accounts for the tax deducted to HMRC.
For example:
UK Company → Interest → Overseas Company
If the payment falls within the UK withholding tax rules, the UK company may need to deduct tax before making the payment.
The overseas company receives the net amount, while the UK company accounts for the tax deducted to HMRC.
Importantly, not every payment made to an overseas company is subject to UK withholding tax.
The type of payment is critical.
Which Payments Can Be Subject to UK Withholding Tax?
The main categories relevant to UK companies include:
- Certain interest payments
- Certain royalties and intellectual property payments
- Certain annual payments
- Specific categories of payments covered by special rules
For foreign-owned UK subsidiaries, the most common areas are generally intercompany interest and royalties.
Payments for ordinary business services do not automatically become subject to UK withholding tax simply because the supplier is located overseas.
The tax treatment must therefore be considered based on the nature of the payment rather than simply the location of the recipient.
UK Withholding Tax on Interest Paid Overseas
Interest is one of the most important withholding tax areas for international groups.
Where a UK company pays certain yearly interest to an overseas recipient, UK rules can require the payer to deduct income tax at the applicable rate and account for it to HMRC.
This can apply to interest paid to:
- Overseas parent companies
- Foreign group companies
- Overseas lenders
- Other non-UK recipients
For example:
US Parent → Loan → UK Subsidiary
The UK subsidiary pays interest to the US parent.
Before paying the interest, the UK company should determine whether UK withholding tax applies and whether any relief is available.
HMRC confirms that payments of yearly interest to non-UK residents can fall within the deduction-at-source rules.
Can a UK Company Pay Interest to an Overseas Parent Without Withholding Tax?
Potentially, but the answer depends on the specific circumstances.
The UK has Double Taxation Agreements with many countries. These treaties can reduce or eliminate UK withholding tax on certain types of income, including interest.
However, treaty relief is not automatically available simply because the overseas parent is resident in a country that has a tax treaty with the UK.
The relevant treaty conditions must be satisfied and the appropriate relief procedure followed.
HMRC states that treaty relief on interest may allow payments to be made at a reduced rate or with no UK tax deducted, depending on the applicable agreement and HMRC authorisation.
Until the appropriate relief has been obtained, the UK payer should not simply assume that the payment can be made gross.
Double Taxation Agreements and Withholding Tax
A Double Taxation Agreement is an agreement between two countries intended to reduce the risk of the same income being taxed twice.
The UK has a wide network of tax treaties.
A treaty may provide:
- Full exemption from UK withholding tax
- A reduced withholding tax rate
- No change to the domestic UK rate
The result depends on the specific treaty and the type of payment.
For example, the treaty treatment of interest may be different from the treatment of royalties.
The overseas recipient may need to provide evidence of its tax residence and satisfy other conditions before treaty relief can be applied.
Therefore, the UK company should review the specific treaty applicable to the recipient’s country rather than relying on a general assumption that treaty relief is available.
How Is Treaty Relief Obtained?
The procedure depends on the type of payment and the relevant treaty.
For interest, an overseas recipient may need to apply to HMRC for relief from UK withholding tax.
HMRC may then authorise:
- Payment without UK tax deducted; or
- Payment with tax deducted at a reduced treaty rate.
HMRC guidance confirms that relief from UK withholding tax under a Double Taxation Agreement is not automatic.
This is particularly important for intercompany loans.
A UK subsidiary should ideally establish the withholding tax position before interest payments begin.
UK Withholding Tax on Royalties
Royalties and certain intellectual property payments can also be subject to UK withholding tax when paid to overseas recipients.
This can be relevant where a UK subsidiary pays a foreign parent or group company for:
- Patents
- Copyright
- Intellectual property
- Certain software rights
- Other qualifying intellectual property
The exact treatment depends on the nature of the payment and the applicable legislation and treaty.
The UK company should determine whether the payment falls within the relevant definition of a royalty or another category subject to deduction at source.
Where treaty relief is available, the applicable treaty rate and conditions should be reviewed.
Can UK Companies Pay Royalties Overseas Without Deducting Tax?
Potentially.
For certain royalty payments, UK legislation allows a company to apply treaty relief at source where the company reasonably believes that the overseas recipient is entitled to relief under the relevant Double Taxation Agreement.
The UK company must still meet the applicable conditions and reporting requirements.
HMRC also requires relevant cross-border royalty payments to be reported in the appropriate Corporation Tax return where the relevant rules apply.
The treatment of royalties should therefore be reviewed before the first payment is made.
What About Payments for Services?
This is an area where businesses often make incorrect assumptions.
A UK company paying an overseas company for ordinary business services does not automatically have to deduct UK withholding tax simply because the supplier is overseas.
For example:
UK Company → Accounting Services → Overseas Company
or:
UK Company → Consulting Services → Overseas Company
The UK withholding tax position depends on the nature of the payment and the relevant UK rules.
However, other tax considerations may still apply, including:
- Corporation Tax
- VAT
- Permanent establishment considerations
- Transfer pricing for related-party transactions
- Tax treaty provisions
Therefore, “no withholding tax” does not necessarily mean “no UK tax considerations.”
Withholding Tax and Foreign Parent Companies
Foreign-owned UK subsidiaries should pay particular attention when making payments to overseas parent companies.
Common payments include:
| Payment | UK withholding tax consideration |
| Intercompany interest | May be subject to withholding tax |
| Royalties | May be subject to withholding tax |
| Management fees | Depends on the nature of the payment |
| Cost recharges | Depends on the underlying transaction |
| Goods | Generally not treated in the same way as interest or royalties |
| Dividends | UK dividends generally have no withholding tax |
The treatment should be reviewed based on the actual transaction rather than simply its accounting description.
UK Withholding Tax on Dividends
A common misconception is that UK companies generally have to deduct withholding tax when paying dividends to overseas shareholders.
In general, the UK does not impose withholding tax on ordinary UK dividends.
This is different from interest and certain royalty payments, where deduction-at-source rules can apply.
Therefore, a foreign parent receiving a dividend from its UK subsidiary should not normally be treated in the same way as a parent receiving interest on an intercompany loan.
The tax position in the parent’s country of residence may, of course, need separate consideration.
What Happens If Withholding Tax Is Not Deducted?
If a UK company should have deducted withholding tax but pays the overseas company gross, the UK company can potentially become liable for the tax that should have been deducted.
HMRC guidance confirms that where tax should have been withheld and the payer fails to do so, HMRC may seek to recover the tax, together with interest and potentially penalties.
This can create a particularly difficult situation where:
- The overseas parent has already received the full payment.
- The UK company later discovers that withholding tax should have been deducted.
- The UK company must fund the tax liability or attempt to recover the amount from the overseas company.
For this reason, the withholding tax position should be established before making the payment.
Gross-Up Clauses
Intercompany agreements sometimes include a gross-up clause.
This can require the UK company to increase the payment so that the overseas recipient receives the agreed net amount after withholding tax.
For example, an agreement may state that the parent should receive a specified amount after any applicable UK withholding tax.
If a gross-up clause exists, the UK company should consider:
- The contractual obligation
- The withholding tax rate
- The tax treaty position
- The additional accounting cost
- The Corporation Tax treatment
The gross-up calculation should be performed carefully because the additional amount may itself affect the calculation.
Withholding Tax and Intercompany Loans
For foreign-owned UK subsidiaries, the most common practical issue is often interest on an intercompany loan.
Consider:
Foreign Parent → £2 million loan → UK Subsidiary
The UK company pays annual interest to the parent.
Before making the payment, the group should review:
1. Is the payment “yearly interest”?
If so, the UK deduction-at-source rules may apply.
2. Where is the lender tax resident?
The lender’s country of residence determines which treaty may be relevant.
3. Is there a Double Taxation Agreement?
The applicable treaty should be reviewed.
4. Is treaty relief available?
The group should determine whether the treaty reduces or eliminates UK withholding tax.
5. Has the appropriate relief been obtained?
The UK company should not simply assume that treaty relief applies without following the relevant procedure.
6. Has the payment been correctly reported?
The UK company should ensure the relevant tax and reporting obligations are dealt with correctly.
Withholding Tax and Transfer Pricing
Withholding tax and transfer pricing are separate issues, but they can arise from the same transaction.
For example, an overseas parent lends money to its UK subsidiary.
The group may need to consider:
Transfer pricing:
Is the loan and interest rate consistent with the arm’s-length principle?
Withholding tax:
Does the UK subsidiary need to deduct tax from the interest payment?
Corporation Tax:
Is the interest deductible for the UK company?
These questions should be reviewed separately.
A transaction can be correctly priced for transfer pricing purposes but still require UK withholding tax.
Documentation Checklist
A UK company making payments to overseas group companies should maintain appropriate documentation.
This may include:
- Intercompany agreements
- Loan agreements
- Invoices
- Payment records
- Tax residence certificates
- Double Taxation Agreement analysis
- HMRC clearance or authorisation where applicable
- Withholding tax calculations
- Copies of tax filings
- Evidence supporting the nature of the payment
For recurring payments, the withholding tax position should be reviewed periodically, particularly if:
- The recipient changes
- The treaty changes
- The nature of the payment changes
- The loan terms change
- The ownership structure changes
Common Mistakes
1. Assuming all overseas payments are subject to withholding tax
Not every payment to an overseas company requires tax to be deducted.
2. Assuming no withholding tax applies
The opposite mistake can be equally serious, particularly with interest and royalties.
3. Automatically applying a tax treaty
A treaty does not automatically eliminate UK withholding tax.
4. Paying interest gross without clearance
Where treaty relief requires HMRC authorisation, the UK company should not simply pay gross because the parent is treaty-resident.
5. Confusing services with royalties
The nature of the payment needs to be established correctly.
6. Ignoring withholding tax on intercompany interest
Foreign-owned companies sometimes focus on the Corporation Tax deduction for interest and overlook the separate withholding obligation.
7. No evidence of treaty residence
The group should retain appropriate evidence supporting the recipient’s residence and entitlement to treaty relief.
Year-End Withholding Tax Checklist
Before the UK company’s year-end, review:
- All payments to overseas companies have been identified
- Interest payments have been reviewed
- Royalty payments have been reviewed
- Relevant annual payments have been considered
- Service payments have been correctly classified
- Double Taxation Agreements have been reviewed where relevant
- Treaty relief documentation is available
- HMRC authorisations are retained where required
- Withholding tax calculations are reconciled
- Relevant reporting obligations have been completed
- Intercompany balances agree with the overseas recipient
Frequently Asked Questions
Do UK companies have to withhold tax when paying overseas companies?
Not on every payment. UK withholding tax applies to specific categories of payments and can be affected by exemptions and Double Taxation Agreements.
Is UK withholding tax applicable to interest paid overseas?
Potentially. Certain yearly interest payments to non-UK residents can fall within the UK deduction-at-source rules.
Does UK withholding tax apply to royalties?
Certain royalty and intellectual property payments to overseas recipients can be subject to UK withholding tax.
Is withholding tax charged on payments for services?
Not automatically. Ordinary payments for services do not generally fall within the same withholding tax rules as yearly interest and certain royalties. However, the exact nature of the payment should be reviewed.
Can a Double Taxation Agreement reduce UK withholding tax?
Yes. Depending on the relevant treaty and conditions, UK withholding tax can sometimes be reduced or eliminated.
Can a UK company pay interest to an overseas parent without withholding tax?
Potentially, but the UK company should establish whether treaty relief or another exemption applies and whether the required HMRC procedure has been completed.
Are UK dividends subject to withholding tax?
Ordinary UK dividends generally do not have UK withholding tax, including dividends paid to overseas shareholders.
What happens if UK withholding tax is not deducted?
The UK company may become liable for the tax that should have been deducted, together with potential interest and penalties.
Conclusion
Payments from UK companies to overseas businesses require careful tax analysis.
The most important question is not simply “Is the recipient overseas?” but rather:
What type of payment is being made, and what UK withholding tax rules apply to it?
For foreign-owned UK subsidiaries, particular attention should be given to:
- Intercompany interest
- Royalties and intellectual property payments
- Double Taxation Agreements
- HMRC treaty relief procedures
- Tax residence evidence
- Transfer pricing
- Corporation Tax
- Payment and reporting procedures
Establishing the correct withholding tax treatment before making a cross-border payment can help prevent unexpected UK tax liabilities and disputes between the UK subsidiary and its overseas parent.
How FKGB Accounting Can Help
FKGB Accounting works with foreign-owned UK companies and international groups on UK accounting, Corporation Tax, VAT, intercompany transactions and international tax compliance.
We can help UK subsidiaries review payments to overseas parent companies and other group entities, including withholding tax considerations, intercompany interest, royalties, treaty relief and related UK reporting requirements.
To discuss your UK operations, book a meeting through our online calendar or contact us by email for a confidential consultation: David.levy@fkgb.co.uk
