Foreign income

UK resident receives income from US mineral rights

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My client is a Uk resident and receives monthly income from what appears to be mineral royalty rights in the USA. The monthly statements show WH [I assume this is witholding tax] being deducted from the gross at 30% and the net amount being sent to my client monthly.

For the tax year gross income is £6500 and witholding tax is £1950

Ive not come across this before. So my questions are:

In order to report this income in the tax return I have shown the gross and the foreign tax paid in Taxcalc

1.  Do I then tick the FTCR box or not?

2. I am currently reporting this in foreign income under 'interest' but cant see any other place it can go?

3.Does anything need to be input into the box 'maximum % FTCR allowed under DTA?

4. I have noticed the tax liability increases when I tick the FTCR box and reduces when I untick it but not sure why this would be?

Replies (4)

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By David Treitel
18th Jan 2024 13:54

Credit can only be claimed for the actual US tax due. Because the income is US source derived from US land, the client has a US filing requirement. Assuming the client makes a timely net election, which will allow the client to claim expenses in the US including depletion, the actual US tax due - and therefore the amount creditable in the UK - will be significantly below 30%.

You'll need to see the US tax returns filed to calculate the allowable credit.

Incidentally, my interpretation as to where to report US mineral royalties on a UK tax return would not be as "interest". You may wish to review the words in the US-UK tax treaty.

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By taxdigital
18th Jan 2024 18:56

Royalties received by a UK resident is taxable only in the UK (Art 12 US/UK tax treaty) which means US has no taxing rights. So, obviously no foreign tax credit relief will be due. In saying this I do know that in the US there may be taxes at the states' level and at the federal level as well (I've no clue about US taxes though).

Royalties isn't interest anyway; it could either be Royalties or business profits. There should be some boxes within the foreign pages for Royalties for you to fill in.

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Replying to taxdigital:
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By David Treitel
18th Jan 2024 19:19

taxdigital wrote:

Royalties received by a UK resident is taxable only in the UK (Art 12 US/UK tax treaty) which means US has no taxing rights. So, obviously no foreign tax credit relief will be due. In saying this I do know that in the US there may be taxes at the states' level and at the federal level as well (I've no clue about US taxes though).

Royalties isn't interest anyway; it could either be Royalties or business profits. There should be some boxes within the foreign pages for Royalties for you to fill in.

It may assist to clarify that the UK/US tax treaty defines real property at Article 3 (m): in the following way:
“the term “real property” means any interest (other than an interest solely as a creditor) in land, crops or timber growing on land, mines, wells and other places of extraction of natural resources, as well as any fixture built on land (buildings, structures, etc.) and other property considered real or immovable property under the law of the Contracting State in which the property in question is situated. The term shall in any case include livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply, usufruct of real property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits and other natural resources; ships, boats and aircraft shall not be regarded as real property.”

Consequently, royalty income that relates to mineral royalties is treated under Article 3 for UK tax purposes as income from “real property”. These kind of Royalties are not within Article 12. This is identical to how the activity is reported in the United States.

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Replying to David Treitel:
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By taxdigital
18th Jan 2024 19:43

Thanks for that. Now that means Art 6 should be in play and consequently both the US and UK have taxing rights? I think OECD model treaties instead use the term ‘immovable property’

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