HM Revenue & Customs (“HMRC”) has published revised terms and conditions of, and guidance on, its double tax treaty passport (“DTTP”) scheme (the “Guidance”). The DTTP scheme is an administrative simplification designed to assist certain foreign lenders in accessing reduced withholding tax rates on interest that are available within the UK’s tax treaties with other territories. The scheme is generally available to UK borrowers who are required to withhold income tax at the basic rate on certain loan interest payments to overseas lenders.
The DTTP scheme allows certain overseas lenders to be recognised by HMRC as residents of countries with which the UK has a double tax treaty. HMRC recognises such lenders by granting them the status of “treaty passport holder”. Where a loan is dealt with under the DTTP scheme, HMRC may (following submission of a form DTTP2 by the borrower) direct the borrower to pay interest to a treaty passport holder with deduction of withholding tax at the rate specified in the relevant treaty.
Prior to 6 April 2017, the scheme was restricted to overseas corporate lenders and UK corporate borrowers. The Guidance extends the DTTP scheme for loans entered into on or after 6 April 2017. Key elements of the revised scheme are:
- it is now available to all UK borrowers that have an obligation to deduct withholding tax, including UK partnerships, individuals and charities;
- transparent entities (including partnerships) may be admitted to the scheme as lenders where all of the constituent beneficial owners of the income are entitled to the same treaty benefits under the same treaty; and
- sovereign wealth funds and pension funds that are utilising withholding tax treaty rules may be admitted into the scheme as lenders.
Unfortunately, the Guidance no longer assures a borrower that, if it submits form DTTP2 to HMRC at least 30 days before an interest payment date, HMRC will issue any direction in time to be applied to that particular interest payment. It may, therefore, be prudent to allow more than 30 days for an application to be processed, if possible. Furthermore, the guidance contains conflicting statements regarding whether or not a borrower is required to fulfil its legal obligations and withhold tax pending receipt of a formal direction from HMRC. If possible, from the borrower’s perspective it may be advisable to withhold and for the lender to make a repayment claim if relief is granted. However, this is unlikely to be acceptable to lenders, and the position may depend on the bargaining power of the parties in commercial negotiations.