Interest paid by UK companies is generally subject to withholding tax at 20%. Although various exemptions apply, most notably in respect of interest payments to banks and other UK companies, and in respect of securities listed on a recognised stock exchange (so called “quoted eurobonds”), such exemptions are often of limited use in a private placement context, particularly where investors are based outside the UK.
In his 2014 Autumn Statement, the Chancellor recognised that a specific withholding tax exemption for private placements would help to develop the private placement market in the UK and expand the available sources of financing for mid-sized corporate borrowers in the UK. Following a detailed consultation, implementing regulations were made in December 2015 and took effect on 1 January 2016. The new private placement exemption allows a UK corporate borrower to pay interest gross if certain conditions are satisfied.
The Exemption Conditions
In order to qualify for the private placement exemption from withholding tax each of the following conditions must be met:
- There must be a “relevant security”, which broadly means a security or a loan relationship in respect of which a company is a debtor, which is not listed on a recognized stock exchange.
- The term of the security must not exceed 50 years.
- At the time entered into, the security must have a minimum value of £10 million.
- The security must be entered into by the corporate borrower for genuine commercial reasons and not as part of a tax advantage scheme.
- The corporate borrower must reasonably believe that it is not a connected person in respect of each investor/lender.
- The corporate borrower must hold a "creditor certificate" for each investor/lender. A creditor certificate is a written statement in which a confirmation is made by or on behalf of the investor/lender that:
- the investor/lender is a resident of a country that has a double tax treaty with the UK which includes a non-discrimination article. A non-discrimination article is a treaty provision which prevents a state from subjecting the nationals of another state to any tax or connected requirements which is more burdensome than those that apply to its own citizens; and
- the investor/lender is beneficially entitled to the interest on the relevant security for genuine commercial reasons, and not as part of a tax advantage scheme.
Where the exemption conditions are satisfied, the corporate borrower may now pay interest free of withholding. There should be no need to seek advance approval from HMRC and no requirement to go through a double tax treaty clearance procedure. The rules apply to qualifying private placements whether entered into before, on or after 1 January 2016.
Corporate borrowers seeking to rely on the private placement exemption should ensure that they hold (or are entitled to require from investors) a valid creditor certificate. Facility documentation should be drafted to ensure that borrowers are able to obtain the necessary certificate and, from a borrower perspective, to exclude the obligation to gross up interest payments where the lender has failed to provide such a certificate.
While the new exemption will simplify administration in all qualifying circumstances for both borrowers and non-UK institutional investors (whether banks, treaty entitled investment funds or other treaty entitled investors), it will be particularly beneficial to such investors/lenders who do not hold a treaty passport under the DTTP Scheme and who wish to receive interest gross without the need to go through a formal treaty relief application. In addition, the new relief will be particularly relevant to investors/lenders into the UK who are based in jurisdictions with which the UK has a tax treaty which does not provide for a zero treaty rate of withholding on interest.