Under UK law, companies may be required to withhold taxes on certain payments, such as interest, royalties or other sums related to the use of patents. The obligation to withhold will depend on the nature of the payment and the specific circumstances in which it is made.

As a general rule, dividends are not subject to withholding. The exception is Property Income Distributions (PID) dividends paid by UK REITs (Real Estate Investment Trusts), which are subject to a 20% withholding, unless an exemption or reduced rate applies under an agreement to avoid double taxation.

It should be noted that this regime does not cover all possible situations in which a withholding may be required in the United Kingdom. For example:

• Non-resident companies that earn income from rentals of properties located in the United Kingdom are subject to a 20% withholding on payments, unless they have obtained prior authorization under the Non-Resident Landlord Scheme (NRL) to receive income without withholding.
• There are also withholding obligations on certain annual payments, as well as in the following specific cases:

• Payments to non-resident artists or athletes, under the original deduction scheme applicable to performances in the United Kingdom.
• Payments to unregistered subcontractors involved in large construction projects, under the Construction Industry Scheme.

Retention on interest payments

As a general rule, UK tax law requires that a 20% withholding be applied on British-sourced interest payments, regardless of the beneficiary's residence. However, there are several important exceptions to this obligation, which allow certain payments to be made without withholding:

Payments between businesses resident in the United Kingdom: Withholding is not required when interest is paid by a British company to another also resident in the United Kingdom, or to a permanent establishment in the United Kingdom of a foreign entity, provided that such interests are taxed as part of the commercial benefits of the EP.

Quoted Eurobonds: Interest paid on Eurobonds that meet certain requirements is exempt from withholding.

Inter-bank payments: No withholding applies to interest payments made to or by a UK bank, or by a British EP from a foreign bank.

Short-term interests: In general terms, interest derived from loans with a duration not exceeding one year may be exempt from withholding. However, this category can give rise to complex interpretations, so it is recommended to obtain specialist advice if you want to apply this exemption.

Payments not originating in the UK: When interests are not considered to be from a British source, withholding is not required. Since this determination can be complex, professional advice is also recommended in this case.

Private Placement Debt: An exemption is provided for interest payments on certain debts issued privately by UK companies, provided that specific criteria are met.

Pre-Brexit payments covered by the EU Interest and Royalties Directive: Payments made before June 1, 2021 (or March 3, 2021, if anti-abuse measures apply) can benefit from the exemption provided for by this directive, in force before Brexit.

QAHC Qualified Entities (Qualifying Asset Holding Companies) can also benefit from a withholding exemption on certain payments.

If none of these exemptions apply, the paying company must withhold 20% at the time of payment. However, if there is an agreement to avoid double taxation that provides for an exemption or a reduced rate, the company can request authorization from HMRC to make the gross payment or apply the reduced rate, as appropriate.

Royalty Retention

UK tax regulations state that Royalty payments from certain intellectual property rights generated in the United Kingdom — such as patents, copyrights, trademarks, trade names, designs, formulas, know-how and models — are subject to a 20% withholding, regardless of the beneficiary's residence. In some cases, other Royalties may also be subject to withholding if they are considered annual payments under British law, so specialist advice may be needed to determine if withholding is appropriate.

However, there are important exceptions, and certain Royalty payments may be made in gross or with a reduced withholding rate if the established conditions are met. Among the main exemption scenarios are:

• When the beneficial owner of the royalty is a company resident in the United Kingdom, or a permanent establishment in the United Kingdom, or a partnership whose partners meet certain requirements.
• If there is a double taxation agreement that provides for an exemption or a reduced rate of withholding, applicable to the payment in question.
• In payments made before June 1, 2021 (or March 3, 2021, if anti-abuse measures apply), when the exemption would have been applicable under the EU Interests and Royalties Directive before Brexit.

Unlike the applicable interest regulations, prior authorization from HMRC is not necessary to apply an exemption or reduced rate to the payment of royalties, provided that the payer has a reasonable belief that the requirements are met. However, if HMRC later determines that such exemption was not applicable, it may demand payment of the amount corresponding to the withholding, with interest and penalties, even if the initial belief has been founded.

Certain specific royalties such as those related to film rights or equipment are not usually subject to this 20% withholding, although it may be advisable to confirm this depending on the specific case.