Grundy, Milton: From the archive - September 2011

From the Archive – September 2011 by Milton Grundy
A royalty paid to a non-resident suffers withholding tax. This is the general rule, applied by most countries. But there are exceptions, of which the Netherlands is the best-known. And, of course, tax treaties often provide for a lower or zero rate of withholding tax. It will come as no surprise that this led to a Dutch industry of “stepping stones” – companies which received royalties free of withholding under a treaty and paid royalties to a zero-tax destination free of withholding under their domestic law. The only benefit to the Dutch was the tax on the “turn” between the two – and some professional fees for managing the structure. As we learned from Jan Tiesema in Monte-Carlo in 2009, this is not as easy as it used to be, and the Dutch now insist on a level of economic activity in the Netherlands – premises, staff, and so on.

Is there an alternative jurisdiction? Geoffrey Simpson (Montreux, 2011) opened the door to the use of the United Kingdom for such a structure, at least for royalties derived from non-UK copyrights, which are not subject to withholding tax. UK royalties, however, can sometimes be paid gross pursuant to the terms of a treaty. Anthony Murty (Barbados 2006) pointed out that the UK-Barbados treaty provided for royalties to be paid without withholding tax, so long as the recipient was subject to tax on them. It goes without saying that there is no point in avoiding tax in country A in order to pay it in country B, at any rate unless there is a significant difference in tax rates between the two (which is not the case between Barbados and the United Kingdom). Here Anthony Murty came up with a surprise – a surprise at least to his European listeners: in Barbados, a distribution made by trustees to a beneficiary is deductible in computing the tax liability of the trustees. Then came his second surprise: most countries which provide tax-exempt trusts for non-residents – as in Cyprus (see Agatha Katsis, Cyprus 2008), Malta (see Max Ganado, Milan 2004) and the United Kingdom (see Aparna Nathan, Cyprus 2008) – limit the exemption to foreign-source income, but Barbados does not. In Anthony Murty’s example, the non-exempt trust made distributions to an exempt trust, so that while the royalties were fully subject to tax in Barbados, the actual amount of the liability was trifling. Arrangements of this kind will no doubt need to be considered (or reviewed) in the light of the forthcoming UK legislation foreshadowed in the HMRC Technical Note of 1st August (Portfolio of Laws, UK section), though not – it seems – where, but for the “scheme”, the royalties would have been paid to a person resident in a country which has a similar tax treaty with the United Kingdom.