New UK Royalty Withholding Tax and Hybrid Rules:
How Much Change is Needed?
The UK has significantly extended the scope of withholding tax as it applies to royalty payments, and is introducing new rules to target hybrid mismatches. The UK royalty withholding and hybrid rule changes announced in the UK Budget in March 2016 have a clear policy intent. Their aim is to enable the UK to tax IP income considered to have a UK source where the recipient of the income is not treaty protected, or where the reliance on a treaty has a main purpose of mitigating the tax in a manner which is contrary to the object and purpose of the treaty. How far HMRC's ambitions might be for this measure in practice remains to be seen; there are clear indications that they see the potential for action in any structure where IP ownership is not aligned with where the 'DEMPE' functions are located - 'DEMPE' being the OECD's new term for describing functions related to IP (Development, Enhancement, Maintenance, Protection, Exploitation). This alert sets out the rules in brief and explores how to respond. Is a UK specific response required in respect of IP that is connected with the UK and how will HMRC interpret the anti-avoidance rules contained in the provisions?