Part 2Double taxation relief

CHAPTER 3Miscellaneous provisions

Interpretation of double taxation arrangements

132Interpreting provision about royalties influenced by special relationship

(1)

Subsection (3) and section 133 apply if double taxation arrangements—

(a)

make provision, whether for relief or otherwise, in relation to royalties (as defined in the arrangements), and

(b)

contain a special relationship rule.

(2)

A “special relationship rule” is provision that—

(a)

applies if the amount of the royalties paid is, because of a special relationship, greater than the amount (“the ordinary amount”) that would have been paid in the absence of the relationship, and

(b)

has the effect that the provision mentioned in subsection (1)(a) is to apply only to the ordinary amount.

(3)

The special relationship rule is to be read as requiring account to be taken of all factors, including—

(a)

the question whether the agreement under which the royalties are paid would have been made at all in the absence of the special relationship,

(b)

the rate or amounts of royalties, and the other terms, which would have been agreed in the absence of the special relationship, and

(c)

if subsection (4) applies, the factors specified in subsection (5).

(4)

This subsection applies if the asset in respect of which the royalties are paid, or any asset which that asset represents or from which it is derived, has previously been in the beneficial ownership of—

(a)

the person (“PR”) who is liable to pay the royalties,

(b)

a person who is, or has at any time been, an associate of PR,

(c)

a person who has at any time carried on a business which, at the time when the liability to pay the royalties arises, is being carried on in whole or in part by PR, or

(d)

a person who is, or has at any time been, an associate of a person within paragraph (c).

(5)

The factors mentioned in subsection (3)(c) are—

(a)

the amounts which were paid under the transaction, or under each of the transactions in a series of transactions, as a result of which the asset has come to be an asset of the beneficial owner for the time being,

(b)

the amounts which would have been paid under that transaction, or under each of those transactions, in the absence of a special relationship, and

(c)

the question whether the transaction, or series of transactions, would have taken place in the absence of a special relationship.

(6)

Subsection (3) does not apply if the special relationship rule expressly requires regard to be had to the use, right or information for which royalties are paid in determining the excess royalties (and accordingly expressly limits the factors to be taken into account).

(7)

For the purposes of this section, a person (“A”) is an associate of another person (“B”) at a given time if—

(a)

A was directly or indirectly participating in the management, control or capital of B at that time, or

(b)

the same person was, or the same persons were, directly or indirectly participating in the management, control or capital of A and B at that time.

(8)

For the interpretation of subsection (7), see sections 157(1), 158(4), 159(1) and 160(1) (which have the effect that references in subsection (7) to direct or indirect participation are to be read in accordance with provisions of Chapter 2 of Part 4).