The full details of the UK’s new Double Tax Treaty Passport Scheme (“Scheme”) have now been announced by HM Revenue & Customs (“HMRC”). The Scheme is designed to speed up the current process under which treaty-entitled non-UK lenders apply to receive interest payments from UK borrowers with no or reduced withholding tax, which can currently involve a 3-6 month process for each loan made.
Frequent corporate (or other fiscally opaque) lenders to the UK may wish to consider applying for a Scheme passport (“Passport”), which can then be used in relation to all loans made from 1st September 2010 where, otherwise, UK withholding tax would have been due. The Scheme is only available to corporate and other fiscally opaque lenders. Individuals are not eligible.
The Scheme is not compulsory, and lenders may opt to continue to use the existing gross payment clearance application system. Existing clearances are not affected.
Lenders may apply for a Scheme Passport and, if accepted, will be included on a public register of Passport holders. Each Passport will be valid for five calendar years. Subsequently, on making a loan to a UK borrower in respect of which the lender is entitled to reduced withholding under a tax treaty, the lender may notify the borrower of its status as a Passport holder. Provided the borrower then notifies HMRC of the loan, HMRC should issue the borrower with a gross payment notice “as soon as possible” (which HMRC has informally indicated means probably after around three weeks).
Unsurprisingly, a Passport holder must undertake to use its Passport only in respect of loans where all conditions for relief under the relevant treaty are met, and specifically only where the “beneficial ownership” requirement is met (taking into account the “international fiscal meaning” of the term, which was the subject of the much debated Indofood case, as interpreted by HMRC’s guidance). Passport holders must also agree to cooperate with any HMRC review of its use of Passport status, and to promptly provide any and all information HMRC needs in connection with such a review. Passport holders are required to act conscientiously and in good faith.
Implications of Passport use
Passport holders must be prepared to be included on a publicly available register, and to comply with HMRC information requests arising in relation to Passport use.
However, Passport holders should then be able to comply with any requirement in a facility agreement to cooperate in treaty clearance procedural formalities by simply notifying the borrower of its Passport status and reference number and requesting that the borrower notify HMRC of the loan (which it must do within 30 days of the loan).
Loan Market Association’s Standard Documentation
The Loan Market Association’s tax committee is currently considering whether any changes to their standard documentation are appropriate.
Frequent lenders, who currently make administratively burdensome treaty relief applications on a regular basis, may benefit from the Scheme through reduced administrative costs. Borrowers may also benefit through faster gross-payment clearances, where otherwise interest payments may have had to be grossed up for a period under the terms of a facility agreement.
Although in theory a delay in receipt of a gross-payment clearance should not lead to any higher tax cost for borrower or lender, in practice it can involve a time consuming administrative exercise for both lender and borrower. As such, the Scheme is to be welcomed, and regular treaty-qualified lenders to the UK should consider applying for a Passport.