The UK tax authority, HM Revenue and Customs (HMRC), has announced that new double tax avoidance treaties with Bulgaria and Croatia have entered into force.
The 2015 UK-Bulgaria double tax agreement was signed on March 26, 2015, and replaces the former 1987 treaty.
It generally limits the withholding tax rate on dividends income to five percent, if the beneficial owner of the dividends is a resident of the other Contracting State. However, a higher 15 percent rate will apply on the gross amount of the dividends where those dividends are paid out of income (including gains) derived directly or indirectly from immovable property by an investment vehicle that distributes most of this income annually and whose income from such immovable property is exempted from tax.
It provides for a dividends tax exemption if the beneficial owner of the dividends is a company which is a resident of the other Contracting State and is not covered by the above conditions for the application of the 15 percent rate; or if it is a pension scheme.
Interest will either be subject to a five percent rate of withholding tax or will be exempt. Royalty payments may be subject to a five percent rate in the state of the recipient.
In the UK, the 2015 treaty will take effect in respect of income tax and capital gains for any year of assessment beginning on or after April 6, 2016; and in respect of corporation tax, for any financial year beginning on or after April 1, 2016. In respect of withholding taxes, the new treaty became effective for amounts paid or credited on or after January 1, 2016. The treaty became effective in Bulgaria on January 1, 2016.
The tax treaty between the UK and Croatia – the first of its kind – entered into force on November 19, 2015, and replaces the 1981 double tax treaty signed between the UK and the former Yugoslavia.
Under the UK/Croatia DTA, dividend payments will generally be subject to a withholding tax rate of 10 percent.
However, in cases where the beneficial owner is a company which is a resident of the other Contracting State and controls, directly or indirectly, at least 25 percent of the capital of the company paying the dividends, the withholding tax on dividend payments will be five percent. Dividends paid out of income derived directly or indirectly from immovable property by an investment vehicle that distributes most of this income annually and whose income from such immovable property is exempted from tax will be subject to a 15 percent withholding tax rate.
Such dividends will be exempt from tax in the Contracting State of which the company paying the dividends is a resident if the beneficial owner of the dividends is a pension scheme.
Withholding tax on interest at source is capped at five percent. Royalty payments may be taxed in the other Contracting State at a rate of five percent.
The agreement became effective from January 1, 2016, for taxes withheld at source, and it will become effective from April 6, 2016, for income and capital gains tax; and from April 1, 2016, for corporation tax. The agreement became effective in Croatia on January 1, 2016.
In the case of both treaties’ provisions on the taxation of dividends, interest, and royalties, if the beneficial owner of the income, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the income is a resident, through a permanent establishment situated therein, and the holding in respect of which the income is paid is effectively connected with such permanent establishment, the income will be subject instead to the business profit tax rules in the treaty (Article 7).
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