HM Revenue & Customs (HMRC) announced in April 2010 the launch of a new Double Taxation Treaty Passport (DTTP) Scheme for the UK. The scheme is designed to speed up the process by which overseas corporate lenders apply to receive interest payments from UK borrowers with no or reduced withholding tax. Full details of the scheme were released in June. The passport issued under the scheme (the Treaty Passport) can be used from 1 September 2010.
HMRC have undertaken to deal with applications within 30 working days of their being made, so applications will need to be made promptly to ensure that a passport is granted by the launch date. Once obtained, the Treaty Passport will be valid for five years. The old certified claim procedure will remain in existence so those who opt not to use, or who are not eligible for, the new scheme will continue to obtain relief under that method.
Who is eligible?
The DTTP scheme is only open to overseas corporate (or similar opaque) lenders. The overseas corporation must be resident in a country with which the UK has negotiated a double taxation treaty. The relevant double taxation treaty must contain an interest or income from debt-claims article.
The UK has a very wide taxation treaty network, which includes a number of Asian countries. The details of the treaty rate of withholding on interest for a selection of these countries are set out in the table on the following page. Please note that there may be full relief in certain circumstances under the terms of the relevant double taxation treaty with some countries.
HMRC has complete discretion to decide whether or not to grant a Treaty Passport. Individuals are not eligible to apply for Treaty Passports under the scheme.
How does the DTTP scheme work?
An overseas lender will apply to HMRC for a Treaty Passport using form DTTP1. The process involves certification of the tax residence of the applicant company by the tax authority in its home jurisdiction. If the company has made a certified double taxation treaty claim within the last 12 months, the certification process does not need to be repeated and the DTTP1 form can be sent direct to HMRC.
If HMRC grants a Treaty Passport, the passport holder and its unique DTTP number will be entered onto the register of passport holders. This will be a publicly available register and will be available on the HMRC website.
A UK corporate borrower (or a foreign corporate borrower making UK source interest payments) will check the register when it takes a loan from an overseas company with a passport and, by relying on the lender’s passport holder status, can then apply the treaty rate of withholding tax from the start of the loan. The passport holder shall specify what the treaty rate should be.
The passport holder must inform the borrower that the borrower is required to notify HMRC within 30 days, via form DTTP2, of the making of a passport loan. The borrower will also be required to give details of the passport holder lender and the main features and terms of the loan (along with other information). It is important that the information given is both accurate and complete. HMRC may also request copies of the loan documentation for any loan. This information can be passed on to HMRC international business division, the borrower’s tax office and any other HMRC stakeholders as necessary. Once HMRC receives the notification, it will use the information provided to issue a direction (under SI 1970/488) to the borrower as soon as possible. HMRC have informally indicated that it is likely to issue a direction three weeks after receiving a notification, although they will not commit to a timescale until the scheme is fully up and running. Any errors, omissions or misrepresentations in the notification may call into question the legal effect of the direction.
Details of the loan and lender will be entered into the HMRC’s Treaty Clearance database which is available to the HMRC international business division and other HMRC stakeholders. If such a notification is not made within 30 days, the DTTP scheme will not apply to the loan. This means that full withholding tax obligations will apply to interest payments. In this case, a full certified claim will need to be made by the overseas lender in respect of the loan which will result in the issue of a direction in the normal way.
When can the DTTP scheme be used?
The DTTP only applies to claims for relief at source. Any claim for repayment of tax can only be made by using the full certified claim procedure.
A passport holder can only enter into a loan using the Treaty Passport where (to its certain knowledge and belief) all conditions for relief under the relevant double taxation treaty are met. Factors to consider include (amongst others):
- whether the passport holder is subject to tax in their country of residence;
- relief being restricted to the amount of income remitted to that country of residence (where it is not intended to remit the entirety, the DTTP will not be available); and
- the passport holder needing to reasonably demonstrate that it is the beneficial owner of the interest.
HMRC reserves the right to not apply the DTTP scheme to a particular loan or a particular borrower.
What are the implications of holding a Treaty Passport?
All passport holders will be listed on the publicly available register of passport holders. The lender’s details and details of each loan they make under the Treaty Passport will also be entered into the HMRC’s Treaty Clearance database. This database will be available to the HMRC international business division and other HMRC stakeholders.
Passport holders will also be obliged to notify HMRC of any material changes to themselves. If they fail to do so, their passport may be revoked.
By applying for a Treaty Passport, the overseas lender agrees to cooperate with HMRC if it decides to review how a lender is using its passport holder status. This means that the passport holder is expected to provide HMRC with all information needed to conduct such a review. Such information can include copies of loan documentation, replies to specific questions about passport loans and a schedule of all passported loans within a specific period that identifies the UK borrowers, dates of the loans and amounts lent.
If a passport holder is in breach of the terms of the DTTP scheme there are three compliance consequences. These are likely to be applied in order, depending on the gravity of the breach, and are:
- a formal warning;
- suspension of passport holder status for a fixed period; and
- removal of passport holder status.
What are the benefits of using the DTTP Scheme?
The new procedure is more efficient than the current certified claim procedure. Lenders will not need to make an application for each loan they make and the passport application will only need to be made once every five years. Additionally, there is no need for the tax authorities in the lender’s country of residence to submit documents to HMRC under the DTTP scheme, which should mean that the new scheme is much quicker. The administrative burden associated with these loans will therefore be reduced, a factor which will be of most benefit to overseas lenders who frequently lend to UK borrowers.
The new DTTP notification process will establish a relationship between the UK borrower and HMRC. This should simplify communication between the two entities within the taxpayer confidentiality rules and so should speed up the direction process.
Borrowers will also benefit through faster gross payment directions. This should avoid borrowers having to gross up interest payments or having to make other arrangements to avoid an interest payment pending the receipt of a direction.