Withholding tax exemption for private placements

Fri 08 Jan 2016

New withholding tax exemption applies from 1 January 2016

Finance Act 2015 Section 23 introduced new Section 888A into ITA 2007  Pt. 15, Ch. 3 providing an exception for ‘qualifying private placements’ from the general requirement to deduct tax from annual interest paid.  These provisions came into force on 1 January 2016 through The Finance Act 2015, Section 23 (Appointed Day) Regulations 2015.

Background

The financial crisis raised the profile of the dependence of UK businesses on bank lending and a special taskforce was established to see how other lending options could be made available to SMEs. The taskforce identified private placements as alternatives to bank funding.  Private placements are forms of lending made directly to corporate borrowers i.e. as opposed to public bond issues.  One issue which was highlighted, however, is that interest paid by UK companies is generally subject to a 20% withholding tax (WHT) where the debt has a UK source and is capable of lasting for more than one year (i.e. it is annual interest).

Existing exemptions: UK-resident companies and treaty relief

If the borrower believes the lender will be subject to UK corporation tax on the interest income, the withholding requirement does not apply.

If the lender is not subject to UK corporation tax, then the withholding may be reduced or eliminated under the applicable double tax treaty.  However, in cases where investors were unable to obtain full treaty exemption or only a reduction in withholding tax, this acted as a substantial disincentive to non-UK investors.

An exemption was already provided for interest paid to UK banks and for Quoted Eurobonds but private placements are not quoted, so the quoted Eurobond exemption could not apply. 

The new exemption 

 In response to this problem, a further exemption from withholding tax on interest payments (s888A ITA 2007) was therefore introduced by s23 FA 2015 for ‘qualifying private placements’.   The main conditions are:

• the security must be a loan relationship in the hands of the debtor company; and
• it must not be listed (thus ruling out Quoted Eurobonds).Whilst ‘security’ is not defined in s888A, HMRC confirmed in the consultation process that this would cover loans and bonds.  The requirement that it must be a ‘loan relationship’ means that only borrowers within the scope of UK corporation tax will be eligible.  Thus, non-UK borrowers which must deduct withholding tax on UK source interest on private placement funding will not be eligible, unless the funding is in respect of a UK permanent establishment. 

Additional conditions set out in Regulations

‘The Qualifying Private Placement Regulations 2015’ SI 2015/ 2002 laid before the House of Commons on 10 December 2015 specify additional conditions for the exemption to apply, which include:

• the security must be entered into for genuine commercial reasons and not as part of a tax advantage scheme;
• the term of the security must not exceed 50 years;
• at the time it was entered into, the security must either have a minimum value of £10 million itself, or, if lower, be part of a single placement which includes other securities to the same debtor where the value of the placement is at least £10 million;
• the investor must provide a ‘creditor certificate’ confirming its beneficial entitlement to the interest and that it is resident in a qualifying territory (i.e. a territory which has a double tax treaty with the UK which includes a non-discrimination article); and
• the debtor must reasonably believe it is not connected to the creditor.

In the event the creditor becomes aware that the confirmation given in the certificate no longer applies, it must notify the borrower and the certificate will then cease to be effective;

The debtor must be able to produce the creditor certificate to HMRC on request.

Comment

The new exemption provides UK SMEs with access to a wider range of lenders.  SMEs using private placements to raise funding should make sure that their agreement with the creditor requires the creditor to provide the necessary creditor certificate.