Just over a year since the Chancellor of the UK Exchequer George Osborne announced in his Autumn Statement 2014 the introduction of a UK withholding tax exemption for interest paid under private placements (a form of unlisted debt instrument), 1 January 2016 sees the entering into force of an exemption from the obligation to deduct UK income tax from yearly interest paid on “qualifying private placements”.
Boost to a latent UK private placement market
The exemption is a welcome addition to the raft of tax measures introduced by the UK Government since the announcement in 2010 of its long-term economic plan to boost British business and is intended to remove a perceived tax obstacle to the development of a market for UK-based private placements. Almost immediately after the UK Government’s announcement of the exemption back in December 2014, major players in the asset management and insurance fields Allianz Global Investors, Aviva, Friends Life, Prudential, Legal & General and Standard Life announced their commitment to fund £9 billion of private placement investment in UK corporate private placements and infrastructure projects.
The boundaries of the exemption have been flexed considerably since draft legislation was issued in the wake of the announcement in December 2014 and the exemption now represents a significant relaxation of the draft rules. It is evident that particular care has been taken to ensure that the relief is cast far and wide enough to attract the inward investment of international investors without undermining UK withholding tax on interest as a fundamental feature of the UK tax system, and in our view the final product strikes a fair balance on technicalities and procedure. Now, in order to make payments of UK source interest free of UK withholding tax to international investors (the current rate of which is 20%), UK corporate issuers will not need to go to the trouble and expense of listing bonds and investors will not need to apply for treaty relief – assuming of course that the conditions of the new exemption are satisfied.
White & Case played a key role in advising the UK Government in 2014 on the crafting of the new exemption. Over the course of 2015, HM Treasury and HM Revenue & Customs (HMRC) consulted with a range of bodies from private practice and industry and grappled with the meaning of a "private placement": the centre piece, of course, of the new legislation. The result is this:
A private placement for exemption purposes is broadly:
- a security (which includes for these purposes bilateral loans and other loan-type arrangements which in all cases must be capable of transfer),
- with a term of not more than 50 years and a minimum value of £10 million,
- which represents a loan relationship to which a company is a party as debtor,
- which is not listed on a recognised stock exchange, and
- whereby the debtor and each creditor are not connected (or at least the debtor reasonably believes that to be the case).
In addition, certain formalities have to be complied with, most notably the relevant debtor must hold a creditor certificate for each creditor (who must be beneficially entitled to the interest payment) – this certificate is essentially written confirmation from or on behalf of each creditor that it is a resident of a qualifying territory (in simple terms, a state with which the UK has a double tax treaty containing a non-discrimination article) and that it is beneficially entitled to the interest on the relevant security for genuine commercial reasons and not as part of a tax advantage scheme. The rules contain a further anti-avoidance measure from the debtor's perspective.
Naturally, questions have arisen as to how to identify the relevant creditor in any particular case (this will be especially relevant in the fund and alternative credit provider context), and for these purposes the meaning of "beneficially entitled" and "resident" must be scrutinised, particularly in the context of pension funds and aggregating platforms.
Grandfathering and administration?
The regulations have been designed to ensure that the exemption may apply to existing structures as well as those entered into after 1 January 2016 but HMRC is adamant that it does not want to be embroiled in administering the application of the exemption, meaning that HMRC will not be operating a clearance mechanism or issuing directions to debtors and will be relying on industry to formulate a standard form of creditor certificate.
Any issuer considering a delisting of bonds from a recognised stock exchange will therefore need to be certain that each of the conditions is satisfied and that the formalities can be complied with in any particular case. In particular, if the commercial deal is that the qualifying private placement exemption will apply to interest payments in any particular case, an issuer should ensure that it is a requirement of the transaction documentation that each creditor provides a creditor certificate and that it is not required to gross up for UK withholding tax applied to the interest payments as a result of a creditor's failure to produce a valid certificate.
Draft guidance was circulated to working party group members in September however the final form (to be incorporated in HMRC's Savings and Investment Manual) is keenly awaited: we can expect it early this year, HMRC tells us.