A decision from the UK Upper Tribunal in August 2019 may have implications with respect to Irish withholding tax on “trailing commissions”—for instance, payments made as “loyalty bonuses” and rebates of management fees—that are deemed to be “annual payments.” The case demonstrates that trailing commissions paid by fund platform providers to their clients could be subject to withholding tax, and also may have implications for intermediaries, fund managers, and insurance and pension providers in Ireland.
The UK Upper Tribunal (a court that has a status similar to the Irish High Court) reversed a decision of the First-Tier Tribunal in a case concerning “loyalty bonus” payments made by a financial intermediary (the taxpayer) to retail investors who invested in funds through the taxpayer’s platform.
The taxpayer did not charge its clients a separate fee for using its platform. Instead, it negotiated a rebate from underlying fund managers that was based on the level of the annual management charge earned by the manager with respect to the investors holding their interests through the platform. The taxpayer retained a portion of this rebate but used some to pay a “loyalty bonus” to its clients (the investors).
HM Revenue Commissioners (HMRC) contended that these loyalty bonus payments were “annual payments” and, consequently, would be subject to withholding tax. The taxpayer, however, rejected this contention. Eventually, the Upper Tribunal held that the investors did not incur any expense in earning the loyalty bonus payments and that, consequently, these payments had the character of “pure income profit.” On this basis, the payments were found to be annual payments—and therefore subject to withholding tax.
Annual payments; implications for Irish withholding tax
The meaning of the term “annual payment” is not set out in UK or Irish law, though its meaning has been considered in a number of cases. Most of the relevant judgments are from UK cases, and while some of these do not have binding authority in the Irish courts, they could have persuasive authority. In broad terms, the relevant case law indicates that for a payment to be considered an “annual payment,” it would need to have certain characteristics.
The law on the application of withholding tax on annual payments in Ireland and the UK has diverged somewhat over the years. Under Irish tax law, withholding tax at a rate of 20% would be applied in respect of annual payments (other than yearly interest or patent royalties) paid by an Irish company. Unlike in the UK, no distinction is made between Irish tax residents and non-residents.
Consequently, the finding that trailing commissions may constitute annual payments is potentially significant for Irish platform providers, fund managers, and insurance and pension providers (as the ruling would have persuasive value in the Irish courts) as well as their clients.
While HMRC has actively and publicly pursued this question in the UK in recent years, the Irish Revenue Commissioners thus far have not issued any public guidance as to whether or not they consider trailing commissions or similar payments to constitute annual payments subject to withholding tax.
Read a September 2019 report prepared by the KPMG member firm in Ireland
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