Press Room

7 May 2020

Tax News May 2020


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May 2020




Dear friend,

We went into lockdown over two months ago when the evenings drew in at 5pm and there were no leaves on the trees. We’re now in the first week of May, it is pleasantly warm outside and hay fever season is upon us. Let’s hope there will be some light at the end of the lockdown tunnel by the time we put pen to paper for the next newsletter.

In this edition, we’ve taken the Japanese concept of shibui and applied it to tax: aspects of the work we do that appear on the surface to be simple but are in fact complex. We look at a “simple” query regarding royalty withholding tax and then turn our attention, unsurprisingly, to the UK/US double tax treaty!

Happy reading and stay safe!

The Andersen Tax Team









Shibui and the Question of Royalty Withholding Tax 

A colleague in the US recently asked a question about an intra-group royalty payment from the UK to its Swedish parent. The question was whether UK withholding tax (WHT) applied on the payment. This is an apparently simple question but one that has become layered with complexity over the years, due to the evolution of both UK domestic tax law along with international developments, and in this regard BEPS is the gamechanger. Having just read Trevanian’s 1979 bestseller Shibumi, I was vaguely familiar with the Japanese concept of shibui, a meaning which is used to represent something which is apparently simple, yet complex. The term is often used to describe a wide variety of subjects including, but not limited to, art, fashion or architecture. Whether it has ever been applied in the context of tax matters is debatable, but this simple question of whether UK WHT applies to royalties paid by a UK subsidiary to its Swedish parent is multilayered and one whose answer starts with domestic law.

Domestic Law 

Under UK law the royalty is liable to 20% WHT unless treaty relief is available. The Sweden/UK DTA, states that “Royalties arising in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in that other State.” So far so good.

Beneficial Ownership 

So, the treaty allows the royalty to be paid gross, provided Sweden is the beneficial owner. This is a term many will be familiar with, but notwithstanding its familiarity, it is itself multilayered and often very difficult to determine.  There is a growing body of case law to provide guidance (Prevost, Indofood, The Danish Cases, Velcro) all of which consider whether the recipient of an item of income (e.g. a royalty) can be the beneficial owner if it is obligated to pay a proportion of it on to a third party.  Let’s assume for a minute that the Swedish company retained 100% of the royalty, then we’re on the right track.

Multilateral Instrument 

However, the next hurdle is the application of BEPS to the arrangement and specifically whether and how the multilateral instrument applies to the Sweden/UK DTA. Following the global financial crisis (not the one we’re hurtling towards right now, but the one a decade ago!), the OECD, at the request of the G20 nations, began its BEPS project to look at whether cross-border transactions (with a particular emphasis on large multinational enterprises) were being taxed correctly.

One of the outcomes of the BEPS project was the recommendation that countries make several amendments to their DTAs and to achieve this in double quick time the Multilateral Instrument (MLI) was born. The MLI is essentially an overlay to existing DTAs, allowing blanket amendment without years being spent on individual negotiations. Both the UK and Sweden have signed up to the MLI which means the DTA is in fact a CTA or Covered Tax Agreement. This means that the Sweden/UK DTA now contains an anti-abuse provision, per BEPS Action 6, of which there are three categories:

1) a Principal Purpose Test (PPT);

2) a PPT and either a simplified or a detailed limitation-on-benefits (LOB) provision; or

3) a detailed LOB provision supplemented by an anti-conduit rule.

The next step is to find out which one of the above applies to the Sweden/UK DTA. Firstly, you need to consult the OECD’s MLI tracker which is hidden away in a dark corner of the OECD’s site. Remember, Google is your friend, and so are we By inputting Sweden and the UK as the states we want to check we are told that:

Article 7 | Prevention of Treaty Abuse A.10(6),11(5),12(5),20(5) would be replaced by Article 7(1). Article 7(4) would not apply. The Simplified Limitation on Benefits Provision would not apply.


Article 12 of the DTA relates to Royalties. Sub para 5 states as follows:

5. No relief shall be available under this Article if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the rights in respect of which the royalties are paid to take advantage of this Article by means of that creation or assignment. 

However, we’re told that this is disapplied and replaced by Article 7(1) of the MLI which states as follows:

1. Notwithstanding any provisions of a Covered Tax Agreement, a benefit under the Covered Tax Agreement shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement.

An analysis of the differences between the two is beyond the scope of this article. However, the inclusion of the word ‘benefit’ in the MLI paragraph extends the scope to include a tax reduction, exemption, deferral or refund achieved through the application of the relevant DTA.

EU Interest and Royalties Directive 

Before Brexit, when life was simple, we could forget the DTA and rely instead on the EU Interest and Royalties Directive (which of course still applies). This, like DTAs, contains anti-abuse provisions to deny the benefits of the Directive and have been the subject of recent cases before the European Court of Justice (T Denmark and Y Denmark vs. the Danish Ministry of Taxation and in N Luxembourg 1, X Denmark A/S, C Denmark I and Z Denmark ApS vs. the Danish Ministry of Taxation) on the issue of beneficial ownership.

Transfer pricing 

Lest we forget transfer pricing. Not directly relevant to the question of whether WHT applies, but more specifically to the level of the royalty and the issue of deductibility. Has the quantum of the royalty been properly calculated using a benchmarking analysis? Does there need to be any adjustment to the figures for both the domestic tax computations and the treaty relief claim?

Offshore Receipts in respect of Intangible Property

And finally, we find our way back to domestic provisions and the relatively new Offshore Receipts in respect of Intangible Property or ORIP rules. These are aimed at structures where the IP used in the UK has been located in a low/no tax jurisdiction that does not have a “full” tax treaty with the UK. A “full” treaty is one with a comprehensive non-discrimination article and you may be surprised by the treaties that are excluded; new ones with Jersey, Guernsey and the Isle of Man for example, and the treaty with Hong Kong.

Where the rules apply, not just the royalties, but any UK “derived amount,” including capital, from the exploitation of the IP in the UK will be taxed at 20%. However, where there is a full treaty, such as the one between the UK and Sweden, there is an exemption from the rules.

The moral of the story – let’s perhaps leave tax and morality alone – the lesson to be learnt from this exercise is that tax has become evermore complex and the most benign query can lead you down many different paths!

Miles Dean

If you have any queries regarding shibui or international tax matters, please contact Miles Dean on +44 7785 770 431 or




UK/US DTA: Accessing the Treaty

That the UK/US double taxation agreement (DTA) falls within our theme of shibui should not come as a surprise. When it was introduced, the US Treasury published a technical explanation that ran to 131 pages!

And to prove the point, deciding on how to explain the complexities of the DTA, let alone which provisions to focus on, is far from simple. We had four goes and eventually decided to start with what appears, on the face of it, to be a simple question: “Can I use the DTA?”

The answer to this question is twofold: firstly, you need to be tax resident in the UK or the US (unless you are a Government servant), and secondly you also need to be a “qualified person”, a question that is so complex it needs its own article (both in the DTA and for our newsletter).  The DTA then provides an exhaustive list of conditions that (mainly) companies must meet in order to be a qualified person. The purpose of the qualified person test is to sort the wheat from the chaff or, as HMRC put it:

‘These tests, which determine whether a particular category of UK or US resident is a “qualified person”, are all based on the concept that a substantial commercial and economic connection must exist between the taxpayer and the UK or the US to warrant entitlement to treaty benefits. If the standard set by any one of the tests in paragraph 2 is met, then entitlement to all treaty benefits is established (subject to conditions in the articles dealing with the type of income concerned being met).’

So, with that out of the way you’d be excused for thinking that we could move on and consider the application of the DTA itself. But no, life isn’t that simple, particularly if you are a US citizen. Ordinarily, individuals who are residents of a contracting state (say the UK) are entitled to treaty benefits, but that doesn’t prevent states negotiating a non-standard position. Which is what the US has sought to do in its treaties, due to the fact that US citizens are taxed upon their worldwide income and gains, irrespective of where they are resident for tax purposes. To achieve this aim, Art 1(4) states as follows:

‘Notwithstanding any provision of this Convention except paragraph 5 of this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if this Convention had not come into effect.’

This is known as the “savings clause”, though who or what is being saved is not known. There is a comparable power for residents (so the UK can use it) but has no real application, the main purpose, as we have found out, is to enforce citizenship as a base for US taxation.

In addition to the savings clause, is the now standard anti-remittance basis clause.  The aim of this clause is to protect the US’s position by ensuring that UK residents who are non-domiciled and who do not remit their US income cannot claim treaty protection. Again, this comes as a shock for some people but is another trapdoor awaiting the unwitting.

A final example of the complexities of the DTA are the provisions that deal with “transparent entities”, such as partnerships in the UK and Limited Liability Companies in the US. These provisions are very “opaque” themselves (the pun very much intended!) and we will be looking at these in more detail in a future newsletter.

Same old same old 

Even without these particular oddities, DTAs often give rise to results that might appear unusual, especially to the uninitiated! For example, many people believe that if they are resident in one country, say the UK, then they need not worry about paying tax in the country where the income arises (the ‘source state’). This is sadly not always the case because whilst the DTA will exempt some income from taxation by the source state, it mainly divides up the taxing rights.

For example, if a UK resident receives interest from a US bank account, that interest is normally exempt from US taxation (although there are some esoteric exceptions in addition to the ones mentioned above, but space precludes detailing them). By contrast, if the UK resident receives US dividends then the rates of US withholding tax vary from 0% to 15% depending on who the recipient is, how long they have held the shares and how many shares they hold (as a percentage of the total amount of the payer).

The rates work the other way too, but of course the UK doesn’t levy withholding tax on dividends, so US residents don’t have to worry about them.

Tax withheld in one country can usually be credited against the tax due in the other (again, there are exceptions to every rule, just ask Mr Anson). For instance, if the rate of US withholding tax is 15% for a dividend received by a UK resident individual, who pays tax at the higher rate on dividends of 32.5%, then they can use that 15% credit against their UK tax bill, leaving 17.5% to pay to HMRC.


How the DTA is applied also has its complexities. It is not like the good old days, when a Roman could just proclaim that fact to any foreigner and expect to be left alone; nowadays it is almost always necessary to claim the benefit of a DTA. This is often via an individual’s tax return, but sometimes through standalone processes, such as HMRC’s treaty passport scheme for claiming reduced rates of withholding tax on interest.

Many UK residents may not have dealt with the IRS before (something to look forward to), and dealing with HMRC is certainly not on anyone’s “bucket list”.  Don’t envy anyone who is dual resident in the UK and US, and makes a claim under the DTA that they are solely resident in the US. They still have to file in both countries and, in respect of their UK tax return, have to list all the items of income and gains they are claiming exemption for under the UK/US DTA.

Of course, they will not be able to claim treaty exemption for all of their income and gains. For example, if they have a buy-to-let property generating UK rental income, the UK still has first taxing rights under the UK/US DTA and UK tax will be payable on the net profit, although the US is likely to give double taxation relief in respect of the UK tax. Further, by listing all of their worldwide income and gains on the return, even if they are claiming treaty exemption for most of it, they will be telling HMRC how much is at stake. This can give HMRC an incentive to enquire into the treaty claim.  There is a similar issue with the IRS if they are able to claim that they are solely resident in the UK for treaty purposes.  Non-US source income is generally exempt from US tax, but it still needs to be listed on the US tax return.

Julian Nelberg

If you would like further information on US taxation, please contact Julian Nelberg on +44 7803 502 555 or

Paul Lloyds

or Paul Lloyds on +44 7518 810 993 or




UK/US Treaty: Limitation on Benefits

We have already looked at various complexities within the UK/US double taxation agreement (DTA) but there is one particular provision within what is already a complex treaty that warrants its own article, and this is Article 23 Limitation on Benefits (LoB). Even the title causes confusion as it is often referred to as the Limitation of Benefits, sometimes even by the people who negotiated it.

No entry! 

The US were ahead of many countries in respect of their treaty negotiations when in 1981 an initial version of the LoB provision we know and love today was included in their treaty with Jamaica. The 1994 treaty with the Netherlands contained the LoB, which brought it to the attention of the tax world, and was further beefed up in the 2004 protocol.

The function of the LoB article is to stop treaty shopping and it’s fair to say it was a game-changer because until then, many states, including the UK, had relied upon a more purposive interpretation (the principal purpose test or PPT) approach to counter mischief.  Both options have their merits, and are included in the OECD’s minimum standards as part of the Base Erosion and Profit Shifting project referred to in Miles’ article. It is notable, however, that more countries have gone for the PPT over the LoB, even a simplified form thereof.

The LoB article works by only allowing “qualified persons” to access the treaty benefits. However, deciding who or what is a qualified person is enough to give many of us screaming nightmares. The UK/US DTA now contains the standard LoB and to give some idea of the complexity, the LoB article is one of 30 articles. However, of the 131 pages in the US Treasury’s technical explanation of the DTA, 18 are devoted to the LoB article alone.

We have set out below a very simplified description of who may qualify under Article 23. It is imperative to consider the detailed provisions set out in the LoB before considering any UK/US transactions, as a failure to qualify can be very expensive. For instance, Aozora GMAC Investments was a Japanese owned UK company that lent money to a fellow subsidiary in the US. Due to their Japanese ownership they were not qualified persons under Article 23 and the US withheld tax at 30% on the interest payable on the loan. HMRC denied double taxation relief because Aozora had fallen foul of an anti-avoidance provision in the DTA. This case is still proceeding through the courts, but so far Aozora has been unsuccessful in its attempt to obtain double taxation relief of c£4.5mn.

Life is simple… 

Well it is if you are an individual, either of the governments or a company listed on the FTSE or Wall Street, but for anyone else contemplating the DTA, life can be very complicated indeed.

Let’s look at the relatively simple case of a UK company that is not listed itself on the FTSE, but is the subsidiary of a listed group. This subsidiary will be able to access the DTA, provided at least 50% of the votes and value are owned either directly or indirectly by up to 5 companies that are listed on either FTSE or Wall Street (being listed on another exchange does not qualify). If the ownership is indirect, then all intermediate companies must also be qualified persons.

Things then start to get even more complicated as pension schemes and charities need over 50% of their beneficiaries to be individuals who are resident in either the UK or US, whilst trusts need at least 50% of their beneficiaries to be certain types of qualified persons. Other companies are also covered and can qualify if, for at least half the year, at least half of the shares and votes are owned by people who do qualify and less than half of the income is paid away as tax deductible expenses to people outside of the country, although there are exceptions.

All is not lost 

If you don’t qualify under one of these main tests there are others, although they apply to the relevant income or gains rather than the person. In other words, if you qualify under one of the “main” tests then you obtain treaty benefits for all of your income and gains. However, under the other tests it is only income or gains that pass the test that obtain treaty benefits.

The first of these tests is that at least 95% of your shares and value is owned by 7 or fewer “equivalent beneficiaries”. These are residents of a country within the EU or NAFTA that qualify under a different treaty with the UK or US and that treaty has the same terms as the UK/US DTA. What Brexit means for this term is discussed in our article of 4 February 2020. If you meet this criterion, then less than 50% of your income (which also  qualifies for a tax deduction) must be paid to people who are not equivalent beneficiaries.

The second applies where a person carries on a trade or business in either the UK or US and derives income from the other. However, unless you are a bank or registered dealer, any transactions relating to investments are outside the scope of this relief.

You can always ask the Government 

Finally, if you do not qualify under one of the mechanical tests then you can ask the Competent Authority of the country who you are asking for relief if they will grant it for you (e.g. if you are a UK resident and are looking for exemption from US withholding tax in respect of US source interest, you can ask the IRS to grant you relief). In our experience, HMRC tend to be more understanding/pragmatic in their approach than the US in this regard.

Does your head hurt?

The LoB test is very complex and mechanical in its operation. It does have the advantage of giving you an answer, whereas purpose tests can lead to uncertainty because of their subjectivity. However, the LoB test is so complex there is every chance that you will either have asked it the wrong question or taken a wrong turn in the maze of its provisions, leading you to the wrong answer.

If you have any queries regarding whether you qualify for under the LoB, please contact Zoe Wyatt on +44 7909 786 144 or

or Andrew Parkes on +44 7522 229 589 or





Andersen Tax LLP, 80 Coleman Street, London, EC2R 5BJ

Tel: +44 (0)20 7242 5000  |  Fax: +44 (0)20 7282 4337  |





The content of this newsletter and any subsequent updates we send do not constitute tax or legal advice and should not be acted upon as such. Specific tax and / or legal advice should be taken before acting on any of the topics covered.




Andersen Global is an international association of legally separate, independent member firms comprised of tax and legal professionals around the world. Established in 2013 by U.S. member firm Andersen Tax LLC, Andersen Global now has more than 4,500 professionals worldwide and a presence in over 149 locations through its member firms and collaborating firms.


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