UK – Kosovarian DTA entered into force on December 16, 2015

On January 8, 2016 the UK HM Revenue & Customs issued a media release announcing that on December 16, 2015 the Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Kosovo for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital (Hereafter the new DTA) entered into force.

The DTA will replace the Convention between the Socialist Federal Republic of Yugoslavia and the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation with Respect to Taxes on Income, which was signed at London on November 6, 1981.

Based on Article 28 of the new DTA (“Entry into Force”) the fact that the new DTA entered into force on December 16, 2015 means that the provisions of the new DTA shall have effect:
a) in Kosovo:

(i) with respect to taxes withheld at source, on income derived on or after January 1, 2016;
(ii) With respect to other taxes on income and capital, for taxes chargeable for any tax year beginning on or afterJanuary 1, 2016; and

b) in the United Kingdom:

(i) with respect to taxes withheld at source, on income derived on or after January 1, 2016;
(ii) with respect to income tax and capital gains tax, for any year of assessment beginning on or after April 6, 2016;
(iii) with respect to corporation tax, for any financial year beginning on or after April 1, 2016.

Below we will discuss some of the provisions of the new DTA of which we think they might interest our readers.

Taxes covered
Based on Article 2, Paragraph 3 of the new DTA (“Taxes Covered”), the existing taxes to which the Convention shall apply are in particular:
a) in Kosovo:

i) the personal income tax; and
ii) the corporation tax;

b) in the United Kingdom:

i) the income tax;
ii) the corporation tax; and
iii) the capital gains tax;

Paragraph 4 of Article 2, subsequently arranges that the new DTA shall apply also to any identical or substantially similar taxes that are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes.

Permanent establishment
Paragraph 3 of Article 5 of the new DTA (“Permanent Establishment”) arranges that a building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.

Article 7, Paragraph 3 of the new DTA (“Business Profits”) contains a so-called appropriate adjustment clause that applies to profits attributable to a permanent establishment.

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 new 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 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 new DTA (“Associated Enterprises”) contains a so-called appropriate adjustment clause.

Dividends
With respect to withholding taxes on dividends Paragraph 2 of Article 10 the new DTA (“Dividends”) a.o. determines the following:
“However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State;

a) except as provided in sub-paragraph b), such dividends shall be exempt from tax in the Contracting State of which the company paying the dividends is a resident.
b) other than where the beneficial owner of the dividends is a pension scheme established in that other Contracting State, where dividends are paid out of income (including gains) derived directly or indirectly from immovable property within the meaning of Article 6 by an investment vehicle which distributes most of this income annually and whose income from such immovable property is exempted from tax, the tax charged by the Contracting State of which the company paying the dividends is a resident shall not exceed 15 per cent of the gross amount of the dividends.”

Article 10, Paragraph 6 of the new 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
Article 11 of the new DTA (“Interest”) arranges that a Source State in not allowed to withhold withholding taxes over interest payments.

Article 11, Paragraph 5 of the new 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 debt-claim in respect of which the interest is paid to take advantage of this Article by means of that creation or assignment.”

Royalties
Article 12 of the new DTA (“Royalties”) arranges that a Source State in not allowed to withhold withholding taxes over interest payments.

Article 12, Paragraph 5 of the new 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
The new DTA also contains an article regarding Limitation of Relief (Article 22). Furthermore the new DTA arranges for a Mutual Agreement Procedure (Article 24), the Exchange of Information (Article 25) and the Assistance in the Collection of Taxes (Article 26).

Click here to be forwarded to the text of the new DTA as available on gov.uk, which will open in a new window.