In this week’s Q&A, Croner-i tax adviser Amaira Badat, considers the most favoured nation rule under double taxation agreements when calculating withholding tax
My client is a UK resident company who pays royalties to a recipient in Lithuania. They have been withholding 20% tax on the royalties and pay this to HMRC using Form CT61.
Our understanding was that the recipient would then claim foreign tax credit relief for the amount allowed under the UK-Lithuania double tax treaty (5%/10%) and claim the remainder back from HMRC.
The recipient has now been informed that because Lithuania has entered into a double tax treaty with Japan, there should be no withholding tax and there will be no foreign tax credit relief available going forwards. Accordingly, they also wish to simplify matters so that they can receive the royalties gross going forwards.
