In the UK, there is a growing market for non-bank lending or private placements. By this we mean the placement of debt with a small group of non-bank investors looking for alternative investment opportunities and preferring to hold debt for the entire term of the loan, often on a fixed or inflation linked basis. Non-bank lending may be an important source of funding for energy and infrastructure projects in particular.
In the Autumn Statement, the Chancellor announced a new targeted exemption from withholding tax for interest on private placements. If interest could be paid without withholding tax, it would be a boost for liquidity in the UK non-bank lending market.
We expect this measure to benefit transparent funds looking to diversify their asset base by making energy and infrastructure investments.
Details were published on 10 December, but already the impact has been felt with Allianz Global investors announcing it will buy more than £3 billion of infrastructure loans over the next three to five years.
What will change?
There is a 20% withholding tax on payments of interest made by a UK borrower where that interest has a UK source. There are already numerous exemptions to this, the principal ones being where the lender is a UK bank (or UK branch of an overseas bank), where the lender is a UK resident company or a UK branch of a non-resident company, or where the lender is resident in a jurisdiction that has an appropriate double taxation treaty with the UK that reduces the interest withholding tax to zero. There is also an exemption for listed bonds (known as the “quoted Eurobond” exemption) that is typically used where it is intended that the financing may be sourced from a wider net of investors.
The new exemption will apply to payments of interest on a ‘qualifying private placement’. A qualifying private placement is defined as a security which:
- is issued by a company and is a ‘loan relationship’ (effectively a loan of money) with the company as borrower;
- has a tenor of at least 3 years; and
- is unlisted.
Further conditions may be introduced via secondary legislation and could include limits on the type of issuers or holders of these instruments as well as on the size of the debt, and may include limitations on the type of activity that may benefit from this exemption.
At present, private placements are sometimes undertaken to fund certain activities (often infrastructure-related) but, depending on the investors, additional steps are often required to ensure that investors can lend without UK withholding tax. This may range from listing the notes to make use of the quoted Eurobond exemption to ensuring that each lender fills out a treaty clearance application (which in the case of an overseas fund can often be complicated and time-consuming).
It is hoped that this new exemption will remove the need for these additional complications and allow transparent funds to enter the market, who might otherwise find it difficult to qualify for withholding tax relief because of difficulty in identifying beneficial owners. The measure is expected to improve liquidity in the infrastructure funding market as well as allowing access to certain types of investor for whom it would have been historically uneconomic to lend to UK ventures.
When will the new exemption apply?
The changes are expected to be introduced in the Finance Act 2015 by amendment to the Income Tax Act 2007. Secondary legislation can be enacted after Royal Assent to the Finance Act 2015, which would usually be in July, although the General Election may have an impact on this. It is therefore to be expected that it is unlikely that the new exemption will apply until the second half of 2015.