Private placements are a form of direct lending to corporates, usually involving the issue of unlisted securities to non-bank investors, such as pension funds or insurers. A developed private placement market already exists in the USA and Germany, and a number of UK issuers have accessed the US market.
UK withholding tax (currently 20% on interest payments) is one barrier to the development of the market in the UK. This was highlighted by the Association of Corporate Treasurers (ACT) in a report from December 2012.
Existing exemptions from UK withholding tax are not well-tailored to private placements. For example, because the securities are unlisted, the "quoted Eurobond" exemption for securities listed on a recognised stock exchange does not apply. Other exemptions (e.g. for payments to UK banks and corporation taxpayers) do not apply to non-UK investors, and although it might be possible for such lenders to obtain relief under an applicable double tax treaty, there is no exemption as such for private placements. The ACT recommended a specific and straightforward withholding tax exemption for UK private placement investments (akin to the "quoted Eurobond" exemption).
The Government's proposal is to introduce a specific exemption from withholding tax for private placements, but only if certain conditions are met.
The security would have to be:
- a loan relationship of the issuing company;
- issued for a minimum period of 3 years; and
- not listed on a recognised stock exchange.
A number of further conditions, to be set out in regulations, would also have to be met in relation to the issuer, the holder and the security itself. The proposals include the following.
The issuer would have to be a trading company. The issue size would have to be between £10 million and £300 million.
Various conditions would need to be met by the holder (who would have to confirm its status on acquisition and periodically thereafter). These requirements include being: (i) unconnected with the issuer; (ii) a UK-regulated financial institution or equivalent entity authorised outside the UK; and (iii) resident in a qualifying territory - broadly a jurisdiction with which the UK has a double tax treaty with a non-discrimination article. Conduit structures would be looked through to the ultimate holder.
Various further conditions would need to be met in relation to the security itself, including that it ranks at least pari passu with other unsecured debt of the issuer, has a maturity of between 3 and 30 years, pays interest at a normal commercial rate, is issued in a minimum denomination of £100,000 and has no right of conversion into shares of the issuer.
Finally, an anti-avoidance provision would apply if the security is issued or held for an unallowable purpose.
In concept, the proposal is to be welcomed, and members of the Investment Management Association are reported to have responded by committing to investing at least £9 billion in UK infrastructure projects.
This is encouraging. The detailed conditions in the proposed regulations are less so. Indeed, what is proposed is a world away from the simplicity of the "quoted Eurobond" exemption. (There remains a distinct possibility that, before long, this exemption too will be subject to additional conditions to counter perceived avoidance.)
A number of points of detail need to be assessed, for example, as regards the issue size limitations, the connection test and whether the trading requirement is too narrow. Risk allocation in documentation is also likely to be particularly fiddly given the various conditions. In this regard, the Loan Market Association is working on template documentation for use in private placement transactions.
More fundamentally, requiring holders to be authorised financial institutions in treaty jurisdictions significantly reduces the benefits of the exemption. It may simply be a more convenient alternative than applying for treaty relief (although that might remain a sensible option if there is doubt about any of the private placement exemption conditions being met). And if treaty relief might otherwise be available, it is not clear what bite the anti-avoidance provision really has. (Another difficult question is likely to be identifying situations when it is, or is not, legitimate to avoid withholding tax by structuring to ensure that the private placement conditions are met.)
Overall, the proposed exemption is a good idea, especially if it assists in the development of a UK private placement market. The key challenge for the Government will be getting the detailed conditions right.