As from 1 June 2010, corporate lenders in jurisdictions with which the UK has a Double Taxation Treaty containing an interest or income from debt claims Article may apply for a Double Taxation Treaty Passport (“Treaty Passport”). The effect of the Treaty Passport scheme is to simplify the standard procedure for applying for relief at source in relation to loans made to UK companies on or after 1 September 2010.
Currently, in order to apply for relief at source from a withholding of UK income tax on interest payments under a Double Tax Treaty, an overseas lender must generally submit a form containing information, regarding the circumstances of the loan being made and regarding itself, to HM Revenue & Customs (“HMRC”) in respect of each loan made by that lender. The form is also required to contain a certification by the overseas tax authority that the lender is resident in the relevant overseas jurisdiction for the purposes of the Double Tax Treaty. If the application is granted, HMRC will then send a direction to the borrower to make payments to the lender free from withholding of UK income tax (or at the lower rate applicable under the Double Tax Treaty). This process will continue to apply to non-resident lenders which are not treated as corporations in their jurisdiction of residence for tax purposes and to all claims for repayment of tax withheld at source. Similarly, the syndicated loans element of HMRC’s Provisional Treaty Relief Scheme will remain in place (although it is due to be re-launched as the Syndicated Loan Scheme).
The Treaty Passport Scheme
Under the new Treaty Passport scheme, a non-resident corporate lender will simply be required to apply once for a Treaty Passport and will then be entered by HMRC into a register on the HMRC website and granted a Treaty Passport number. HMRC will deal with any application within 30 days of it being made.
Once the lender is registered, its only obligations in relation to each new loan are to notify the borrower of the lender’s Treaty Passport number and of the requirement to send a Form DTTP2 notification to HMRC within 30 days of making the loan. However, the lender is also entitled to represent to the borrower that the borrower’s interest payments will attract relief at the appropriate rate under the Double Tax Treaty.
The borrower must then submit a Form DTTP2 to HMRC disclosing certain details regarding the loan and the lender’s Treaty Passport number. On receiving the notification, HMRC will decide whether to issue a direction to the borrower to pay interest to the lender free of withholding (or at the lower rate applicable under the Double Tax Treaty) and may request copies of the loan documents if it wishes. The requirement for the information provided to HMRC to be accurate and complete for the direction to be valid remains.
The Terms and Conditions of the Treaty Passport mean that each Treaty Passport holder must only use the Treaty Passport where, to its certain knowledge and belief, all conditions for relief under the relevant double taxation arrangements are present. As a result of this requirement, HMRC states that the Treaty Passports can be used where the borrower and the lender are connected (e.g. parent and subsidiary). A breach of this requirement, however, may ultimately lead to the removal of passport holder status (with any suspension or removal being recorded on the publicly available online register).
While the Treaty Passport holder will broadly “self-assess” its entitlement under the relevant Double Tax Treaty, it may still be required to provide HMRC with certification of residence by the relevant overseas tax authority, unless the Treaty Passport holder has been granted a standalone certificate of residence or the Treaty Passport holder has made a certified claim under the Double Tax Treaty within the previous 12 months.
The Treaty Passport holder is required not to use the Treaty Passport where the circumstances surrounding the loan (including the sourcing of the funds) might call into question the Treaty Passport holder’s beneficial ownership of the interest it receives. This reflects the decision in Indofood International Finance Ltd v JP Morgan Chase Bank NA  EWCA Civ 158, which suggested that there is an “international fiscal meaning” of “beneficial ownership” with the consequence that a claim cannot be made under some Double Tax Treaties where the recipient of the interest does not have the “full privilege to directly benefit from the income” (typically where the lender is a conduit vehicle).
The interest received by the lender must also be “subject to tax” in its jurisdiction of residence (for the purposes of the relevant Double Tax Treaty).
There is a continuing obligation on the Treaty Passport holder to notify HMRC of any changes in its legal form or circumstances which might affect its entitlement under the Double Tax Treaty. HMRC may also request information from the Treaty Passport holder for the purpose of reviewing its status, including copies of loan documentation and schedules of “passported” loans entered into in periods specified by HMRC.
HMRC reserves the right to not to apply the Treaty Passport scheme in relation to a particular loan or borrower. Once granted, the Treaty Passport will be valid for 5 years. HMRC may apply a shorter duration to avoid a glut of renewal applications in five years time if there is a high demand for registration from the outset.
The standard procedure will remain available for borrowers or lenders who do not wish to make use of the lender’s Treaty Passport.
One key benefit of the Treaty Passport scheme is likely to be that some time is saved when the new Treaty Passport procedure is compared to the standard procedure. This derives primarily from the removal of the need to certify the lender’s residence each time an application for relief at source is made. The time in which HMRC are required to process the Form DTTP2 submitted by the borrower will be “as soon thereafter as is practicable”. While HMRC informally had previously indicated that this might mean two or three weeks, no commitment has since been made. However, given the comparative simplicity of the Treaty Passport process when compared to the standard procedure, the Treaty Passport is likely to result in an improvement on the current system in respect of which applications will usually take between six weeks and three months to process (and longer in complex or exceptional cases).