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UK Tax Treaty Updates

UK Tax Treaty Updates

Updates to the UK’s double tax treaty network.

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We have had a busy start to 2020 in the UK tax policy space and this includes important and positive developments to the UK double tax treaty network. 2019 ended with the UK concluding a double tax treaty with Colombia, the coming into force of the Israeli treaty, as well as the publishing of the synthesised texts of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting – the Multilateral Instrument (MLI) – with major jurisdictions, including Canada, India and Luxembourg. In 2020 we have developments with Belgium, the Netherlands and Ukraine.

 

MLI Updates: Belgium and Netherlands

On 6 and 10 January 2020, HMRC published the synthesised texts of the UK’s double tax treaties with each of the Netherlands and Belgium, reflecting the changes made to the respective treaties by the MLI. The documents result from the jurisdictions each depositing with the OECD the instrument of ratification of the MLI, and reflects the modifications and reservations of each of the jurisdictions submitted to the depositary on ratification.

The entry into force of the revised treaties with both Netherlands and Belgium (as modified by the MLI) are not backdated, instead, they will apply for withholding tax purposes, for amounts paid or credited from 1 January 2020, for other UK income and capital gains tax purposes, from 6 April 2020 and for UK corporation tax purposes, from 1 April 2020.

In respect of Article 7 of the MLI which tackles treaty abuse, the synthesised texts of both treaties include the default option of a principal purpose test (PPT), supplemented by a ‘safety-net’ mechanism.

On permanent establishments (PE), the texts treat the artificial avoidance of PE status through specific activity exemptions in the same manner. The UK-Belgium and UK-Netherlands texts both introduce the artificial avoidance of PE concept into the treaties by limiting the exclusions to the term ‘permanent establishment’ and by adding an anti-fragmentation rule.

In light of the above developments, it is pertinent to consider whether existing treaty claims and positions adopted may need to be re-evaluated going forward. Moreover, it should also be noted that the original treaty and the MLI remain the applicable legal texts in the event of any dispute, however the synthesised versions should provide an easier point of reference at first instance.

 

Protocol in force: Ukraine

On 17 January 2020, HMRC announced that the protocol to the treaty between the UK and Ukraine, signed on 9 October 2017, entered into force on 5 December 2019. The Protocol introduces various amendments including a 5 percent withholding tax rate on interest instead of the previous 10 percent rate, a PPT and the mutual agreement procedure for treaty dispute resolution by means of arbitration. The provisions of the protocol have effect from 1 January 2020 for taxes withheld at source, 6 April 2020 for income tax and capital gains tax in the UK and 1 April 2020 for UK corporation tax.

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