UK to UAE Royalties: Do You Have to Withhold 20% Tax?

A UK company pays £100,000 to a UAE company for the right to use a trade mark.

How much should reach the UAE?

£80,000?

Or the full £100,000?

The answer can be either, depending on whether the UK withholding tax rules apply and whether the payment qualifies for relief under the UK–UAE Double Taxation Convention.

Under UK domestic rules, a royalty paid overseas can be subject to withholding tax at the basic rate, currently 20%. But Article 12 of the UK–UAE tax treaty can give qualifying royalties a 0% UK treaty rate. HMRC’s current treaty summary confirms a 0% rate for royalties, provided the conditions for treaty relief are met.

The important part is this:

The 0% rate is not something to assume after the payment has been made. The UK company needs a proper basis for applying it when the royalty is paid.

Here is how the position works.

Quick Answer: Do UK Companies Have to Withhold 20% on Royalties Paid to the UAE?

Potentially, yes. But not always.

Where the UK domestic royalty withholding rules apply, the UK payer can be required to deduct Income Tax at source. The current basic rate is 20%.

However, the UK–UAE Double Taxation Convention changes the position for qualifying payments.

Article 12 states that royalties arising in one country and beneficially owned by a resident of the other country are taxable only in that other country, subject to the treaty's conditions and exceptions. HMRC therefore lists the UK–UAE treaty rate for royalties as 0%.

For a straightforward qualifying case, the difference can therefore look like this:

But getting from the first position to the second requires more than simply saying:

“There is a tax treaty.”

Why Does the 20% Withholding Rule Exist?

Withholding tax is different from the UK company's normal Corporation Tax.

It is tax deducted from the payment before the money reaches the overseas recipient.

UK law contains withholding rules for payments relating to various forms of intellectual property where the relevant conditions are satisfied and the owner is outside the UK.

The intellectual property definition includes items such as:

• trade marks;

• patents;

• designs;

• models;

• plans;

• secret formulas or processes;

• certain copyright;

• commercial, industrial or scientific know-how.

Under the current UK rules, royalty payments for intellectual property such as trade marks can fall within the UK withholding tax regime when paid to a non-UK resident. HMRC's current guidance expressly includes trade marks within the relevant definition of intellectual property. 

So consider a UK trading company using a brand owned by its UAE group company. If the UK company pays for the right to use that trade mark, it needs to consider the UK withholding position before making the payment. 

Who Is Responsible for the Withholding Tax?

This is where founders can misunderstand the risk.

The issue is not only about the UAE company receiving the royalty.

The UK payer needs to consider whether tax must be deducted from the payment.

If £100,000 is payable and the domestic 20% withholding treatment applies, the UK payer would normally deduct £20,000 and pay the balance to the overseas recipient.

HMRC gives the same basic calculation in its current royalty withholding guidance: a £100 million royalty subject to the current 20% basic rate would produce £20 million of withholding.

That is why the withholding position should be reviewed before the first royalty payment, rather than discovered after several payments have already been made.

How Can the UK–UAE Treaty Reduce the Rate to 0%?

This is where Article 12 becomes important.

Under the current UK–UAE treaty, royalties arising in one state and beneficially owned by a resident of the other state are taxable only in the other state, subject to the rest of the treaty.

In practical terms, a qualifying royalty paid from the UK to a qualifying UAE recipient can therefore receive a 0% UK treaty rate.

HMRC's current UAE treaty summary confirms:

Royalties: 0% — Article 12.

Article 12 itself covers payments for the use, or right to use, assets including:

• copyright;

• patents;

• trade marks;

• designs or models;

• plans;

• secret formulas or processes;

• certain commercial, industrial or scientific know-how.

So a genuine trade mark licence between a UK company and a UAE company can potentially fall within Article 12.

But that does not mean every UK-to-UAE payment labelled “royalty” automatically qualifies.

0% Is Not Automatic: What Has to Be Checked?

There are several questions to answer before relying on the treaty.

1. Is the payment actually a royalty?

Calling an invoice a “royalty” does not make it one.

There should be a real right being granted.

For example:

The UAE company owns a trade mark and gives the UK company the right to use that trade mark under a genuine licensing arrangement.

That is very different from simply moving money between two related companies and describing it as a royalty.

2. Is the UAE recipient entitled to treaty benefits?

Article 12 requires the royalties to be beneficially owned by a resident of the other treaty state.

So the UK payer needs a reasonable basis for its conclusion that the UAE recipient meets the relevant treaty conditions.

This is one reason why residency and ownership should be established rather than assumed.

HMRC's treaty summary specifically warns that the published treaty rate does not mean relief is automatic: other conditions, including beneficial ownership, still have to be met.

3. Is there a UK Permanent Establishment issue?

Article 12 contains an exception where the beneficial owner carries on business through a Permanent Establishment in the country where the royalty arises and the relevant IP right is effectively connected with that PE.

In that situation, the normal Article 12 treatment does not apply in the same way; Article 7 becomes relevant instead.

This will not apply to every structure, but it should not be ignored where the UAE company has meaningful UK operations.

4. Is the royalty amount commercially supportable?

Related companies cannot simply choose any royalty percentage they like.

Article 12(4) deals specifically with a special relationship between the payer and the recipient.

If that relationship causes the royalty to exceed what independent parties would have agreed, Article 12 protection applies only to the independent-party amount. The excess remains subject to the domestic tax rules of the relevant countries.

We will cover royalty benchmarking separately, but the important point here is simple:

A 0% treaty rate does not make an unsupported royalty amount safe.

5. Does the arrangement pass the current treaty anti-abuse rule?

The UK–UAE treaty has been modified by the Multilateral Instrument, or MLI.

The current anti-abuse rule is the Principal Purpose Test (PPT).

Broadly, a treaty benefit can be denied where, considering all the relevant facts and circumstances, it is reasonable to conclude that obtaining that treaty benefit was one of the principal purposes of an arrangement or transaction, unless granting the benefit would still be consistent with the object and purpose of the treaty provision.

This does not mean that having a tax benefit automatically makes a structure invalid.

It does mean the commercial reason for the arrangement, how it operates and the wider facts matter.

Do You Need HMRC Approval Before Paying the Royalty at 0%?

This is one of the most useful parts of the UK rules.

For qualifying royalty payments, a UK company does not necessarily need to obtain prior HMRC clearance before applying the treaty rate.

Section 911 of the Income Tax Act 2007 allows a company to use the treaty rate where it reasonably believes, at the time the payment is made, that the beneficial owner is entitled to the relevant treaty relief.

HMRC's current guidance confirms that this can include paying the royalty gross where the applicable treaty rate is 0%.

Three words matter:

Reasonably

There must be a sensible basis for the position.

Believes

Someone needs to have actually considered whether the treaty conditions are met.

At the time

The position should exist when the payment is made — not be constructed only after HMRC asks questions.

HMRC also explains that the payer does not need absolute certainty. A reasonable belief can be based on assurances from the recipient or an intermediary where the payer considers those assurances sufficient.

What Evidence Should Be in Place Before the Royalty Is Paid?

There is no single statutory checklist saying every company must hold exactly the same documents.

That distinction matters.

Section 911 is about whether the payer had a reasonable belief at the time of payment. HMRC's guidance allows that belief to be based on sufficient assurances and supporting information.

In practice, however, a UK company relying on a 0% treaty position should normally be able to show why it reached that conclusion.

A practical file may include:

The licence agreement

What IP is being licensed?

Who owns it?

What rights does the UK company receive?

What territory and period does the licence cover?

Evidence supporting UAE treaty residence

The UK payer should have a basis for treating the recipient as a UAE resident entitled to the treaty.

The exact evidence will depend on the facts.

Beneficial ownership support

Why is the UAE company genuinely entitled to the royalty income?

Is it receiving the income for itself, rather than merely acting as a pass-through in a wider arrangement?

Royalty calculation

How was the amount calculated?

If the parties are connected, what supports the commercial level of the royalty?

This becomes particularly important because Article 12(4) limits treaty protection where a special relationship has inflated the payment.

Treaty analysis

Why does Article 12 apply to this particular payment?

Which conditions have been checked?

Are there any exceptions?

Commercial rationale

Why does the arrangement exist?

What business purpose does the UAE ownership or licensing structure serve?

This is especially relevant when considering the Principal Purpose Test.

Payment approval

The company should be able to show that the treaty position was considered before the payment was made.

The purpose of this file is not paperwork for the sake of paperwork.

It is to answer a very simple future question:

Why did the UK company believe it was entitled to pay this royalty without withholding 20%?

A Simple £100,000 Example

Imagine:

UK Trading Ltd uses a trade mark owned by UAE IP Ltd.

Under their licence agreement, the UK company owes a gross royalty of:

£100,000

Scenario 1 — UK domestic withholding applies and no treaty relief is used

Gross royalty: £100,000

20% withheld: £20,000

Amount paid to UAE company: £80,000

Scenario 2 — The 0% treaty position is properly available

Gross royalty: £100,000

UK withholding at treaty rate: £0

Amount paid to UAE company: £100,000

That is a £20,000 cash-flow difference on one payment.

But the lesson is not:

“Always pay UAE royalties gross.”

The lesson is:

Establish the correct withholding position before the money moves.

What Happens If the UK Company Applies 0% and Gets It Wrong?

This is where Section 911 becomes particularly important.

If it later turns out that the recipient was not entitled to treaty relief, the law can treat the special Section 911 treatment as if it had not applied.

HMRC can then seek the Income Tax that should have been deducted. HMRC's guidance also confirms that penalties can arise where the company did not genuinely believe the recipient qualified or could not reasonably have held that belief.

That is why:

“Our accountant said the treaty was 0%”

is not the same thing as having a considered and supportable treaty position.

The 5 Common Mistakes We See in UK–UAE Royalty Payments

1. Assuming the treaty applies automatically

A 0% treaty rate is only useful if the conditions for relief are actually met.

2. Looking at withholding tax after the first payment

The reasonable-belief test matters when the payment is made.

3. Having no real licence

The payment should relate to a genuine IP right and commercial arrangement.

4. Choosing the royalty percentage because it creates the biggest tax saving

A related-party royalty still needs commercially supportable pricing.

5. Treating the UAE entity as a paper recipient

Residency, beneficial ownership, commercial purpose and the wider structure still matter.

What If You Have Already Withheld 20%?

If UK tax has already been deducted but the recipient was entitled to a lower treaty rate, treaty relief or repayment may potentially be available.

The exact route depends on the circumstances.

But from a planning perspective, the better approach is normally to determine the correct treatment before future payments are made, rather than repeatedly creating unnecessary withholding and trying to recover it later.

UK–UAE Royalty Payments: The Practical Checklist

Before the UK company pays the first royalty, ask:

• Is this genuinely a royalty?

• Does UK domestic withholding apply?

• Does Article 12 cover the payment?

• Is the UAE recipient entitled to treaty benefits?

• Is it the beneficial owner of the royalty?

• Is there a relevant UK PE issue?

• Is the royalty amount commercially supportable?

• Has the Principal Purpose Test been considered?

• Does the UK payer have reasonable grounds for applying 0% at the time of payment?

• Can those grounds be evidenced later?

If one of these questions has no clear answer, the withholding position should be reviewed before the payment is made.

How Evolve Tax Helps With UK–UAE Royalty Structures

A royalty structure is not simply:

UAE company + licence agreement + 0% withholding.

The UK and UAE sides need to work together.

At Evolve Tax, we help UK-connected founders review:

• UK royalty withholding exposure;

• UK–UAE treaty entitlement;

• IP ownership and licensing arrangements;

• beneficial ownership and residency evidence;

• royalty pricing;

• treaty anti-abuse risk;

• and the wider commercial structure supporting the payments.

Paying royalties from your UK business to a UAE company?

Review the withholding position before the first payment moves.

Book a UK–UAE Royalty Review with Evolve Tax.

Frequently Asked Questions

1. Does every royalty from a UK company to a UAE company have 20% tax withheld?

No.

UK domestic withholding rules can apply, but the final position depends on the type of payment, the facts and whether treaty relief is available.

For qualifying UK–UAE royalty payments, Article 12 can produce a 0% UK treaty rate.

2. Is the UK–UAE treaty royalty rate really 0%?

Yes, where the treaty conditions are satisfied.

HMRC currently lists the UAE treaty royalty rate as 0% under Article 12.

That does not mean every payment automatically qualifies.

3. Does Article 12 cover trade mark royalties?

Yes. The treaty's royalty definition expressly includes payments for the use, or right to use, a trade mark, alongside several other forms of intellectual property.

4. Do I need HMRC clearance before paying the royalty at 0%?

Not necessarily.

Section 911 allows a UK company to apply the treaty rate without prior clearance where it reasonably believes, at the time of payment, that the beneficial owner is entitled to treaty relief.

The company should still be able to support why that belief was reasonable.

5. Do I need a specific HMRC document pack before paying gross?

There is no single statutory checklist prescribing one fixed file for every royalty payment.

What matters under Section 911 is whether the payer had a reasonable belief at the time of payment.

In practice, keeping clear supporting evidence makes that position much easier to defend.

6. What if the royalty rate between the UK and UAE companies is too high?

Article 12(4) can restrict treaty protection to the amount independent parties would have agreed where a special relationship has increased the royalty.

The excess may remain taxable under domestic rules.

That is why the royalty percentage itself needs commercial support.

7. What happens if HMRC later decides the 0% position was wrong?

HMRC can recover tax that should have been withheld.

Penalties may also be relevant where the payer did not have a genuine or reasonable basis for applying treaty relief.

Conclusion: The Treaty Rate May Be 0%, But the Work Comes Before the Payment

A UK company paying royalties to a UAE company should not automatically deduct 20%.

But it should not automatically pay gross either.

The correct sequence is:

First, identify the payment.

Then check the UK withholding rule.

Then establish whether Article 12 applies.

Then confirm the recipient and wider arrangement meet the treaty conditions.

Then build the reasonable basis for applying the treaty rate.

Then make the payment.

For a qualifying UK–UAE royalty, that process can legitimately take the UK withholding rate from 20% to 0%.

But the strongest position is the one you can explain and evidence before the money leaves the UK company.

Book a UK–UAE Royalty Review with Evolve Tax.