On November 4, 2016 the UK Revenue & Customs issued a press release announcing that on November 3, 2016 the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Kingdom of Lesotho signed an Agreement for the Avoidance of Double Taxation with respect to Taxes on Income and on Capital Gains (Hereafter: the DTA).
Although the DTA has been signed, it has not entered into force yet. For the DTA to enter into force, the respective ratification procedures have to have been finalized in both countries.
When entering into force the DTA will replace the Convention between the Government of the Kingdom of Lesotho and the Government of the United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital gains signed at London on January 29, 1997.
Below we will discuss a selection of provisions included in the DTA of which we think they might interest our readers.
Taxes covered
Based on Article 2, Paragraph 3 of the DTA (“Taxes covered”), the existing taxes to which the Agreement shall apply are in particular:
a) in Lesotho, the taxes imposed under the Income Tax Act, 1993 (Act No 9 of 1993), as at the date of signature of this Agreement;
b) in the United Kingdom:
i) the income tax;
ii) the corporation tax; and
iii) the capital gains tax.
Article 2, Paragraph 4 subsequently arranges that the DTA The Agreement shall apply also to any identical or substantially similar taxes that are imposed after the date of signature of the Agreement in addition to, or in place of, the existing taxes.
Residency
With respect to the residency of a person other than an individual, Article 4, Paragraph 3 of the DTA (“Resident”) arranges that where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then the competent authorities of the Contracting States shall endeavour to determine by mutual agreement the Contracting State of which that person shall be deemed to be a resident for the purposes of this Agreement. In the absence of a mutual agreement by the competent authorities of the Contracting States, the person shall not be considered a resident of either Contracting State for the purposes of claiming any benefits provided by the Agreement, except those provided by Articles 21 (“Elimination of double taxation”), 23 (“Non-discrimination”) and 24 (“Mutual agreement procedure”).
Permanent establishment
Article 5, Paragraph 3 of the DTA (“Permanent establishment”) arranges that the term “permanent establishment” also encompasses:
a) a building site, a construction, assembly or installation project or any supervisory activity in connection with such site or project, but only where such site, project or activity continues for a period of more than six months;
b) the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by an enterprise for such purpose, but only where activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods exceeding in the aggregate 183 days in any twelve month period commencing or ending in the fiscal year concerned;
c) for an individual, the performing of services in a Contracting State by that individual, but only if the individual’s stay in that State, for the purpose of performing those services, is for a period or periods aggregating more than 183 days within any twelve month period commencing or ending in the fiscal year concerned;
d) an installation or structure used for the exploration for natural resources provided that use of the installation or structure continues for a period of not less than 90 days within any twelve month period commencing or ending in the fiscal year concerned.
Immovable property
Article 6, Paragraph 1 of the DTA (“Income from immovable property”) arranges that income derived by a resident of a Contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in that other State.
With respect to immovable property Article 13, Paragraph 1 of the DTA (“Capital gains”) arranges that gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State.
Article 13, Paragraph 2 of the DTA subsequently arranges that gains derived by a resident of a Contracting State from the alienation of shares, other than shares in which there is substantial and regular trading on a Stock Exchange, or comparable interests, deriving more than 50 per cent of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State.
Associated enterprises
Article 9, Paragraph 2 of the DTA (“Associated enterprises”) contains a so-called appropriate adjustment clause.
Article 9, Paragraph 3 of the DTA subsequently arranges that where paragraph 2 requires a Contracting State to make an appropriate adjustment to reflect the inclusion and taxation of profits by the other Contracting State falling within paragraph 1, the State making the appropriate adjustment shall not be required to take into account any penalty, whether tax or non-tax, imposed by that other Contracting State.
Dividends
If the beneficial owner of the dividends is a resident of the other Contracting State, Article 10, Paragraph 2 of the DTA (“Dividends”) maximizes the withholding tax a Source State is allowed to withhold over dividends to:
a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 10 per cent of the capital of the company paying the dividends;
b) 10 per cent of the gross amount of the dividends in all other cases.
Article 10, Paragraph 3 subsequently arranges that notwithstanding the provisions of paragraph 2, dividends paid out of income (including gains) derived directly or indirectly from immovable property within the meaning of Article 6 by an investment vehicle that is a resident of a Contracting State whose income from such immovable property is exempt from tax and which distributes most of that income annually may also be taxed in that State and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed 15 per cent of the gross amount of the dividends.
Article 10, Paragraph 8 of the DTA contains an anti-abuse clause which reads as follows:
“No relief shall be available under this Article if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the shares or other rights in respect of which the dividend is paid to take advantage of this Article by means of that creation or assignment.”
Interest
If the beneficial owner of the interest is a resident of the other Contracting State, Article 11, Paragraph 2 of the DTA (“Interest”) maximizes the withholding tax a Source State is allowed to withhold over such interest to 10 per cent of the gross amount of the interest.
Article 11, Paragraph 8 of the DTA contains an anti-abuse clause which reads as follows:
“No relief shall be available under this Article if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the debtclaim in respect of which the interest is paid to take advantage of this Article by means of that creation or assignment.”
Royalties
If the beneficial owner of the royalties is a resident of the other Contracting State, Article 12, Paragraph 2 of the DTA (“Royalties”) maximizes the withholding tax a Source State is allowed to withhold over such royalties to 7.5 per cent of the gross amount of the royalties.
Article 12, Paragraph 7 of the DTA contains an anti-abuse clause which reads as follows:
“No relief shall be available under this Article if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the rights in respect of which the royalties are paid to take advantage of this Article by means of that creation or assignment.”
Other
Furthermore the DTA contains a.o. provisions regarding a Mutual Agreement Procedure (Article 24), regarding the Exchange of Information (Article 25) and regarding the Assistance in Collection of Taxes (Article 26).
Click here to be forwarded to the text of the DTA as available on the website of the UK Government.
Are you looking for other DTAs? Then check our section DTAs & TIEAs, a very efficient way to locate numerous DTAs.
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