UK withholding tax qualifying                          private placement exemption

This article is the second in our new monthly tax series in which TLT’s team of tax specialists will be looking at specific tax issues arising in the financial services sector.

In this month’s article, we discuss the UK’s withholding tax regime including one of the lesser-known exemptions - the “qualifying private placement exemption”.

When does UK withholding tax apply to international banks?

The UK tax legislation imposes a 20% withholding tax on payments of “yearly” interest made by any person (an individual, corporate or trustee) to a person whose usual “place of abode” is outside the UK.

Although there is no statutory definition of “yearly interest”, it is generally treated as interest on a loan or debt that exists for a year or more.

An international bank whose place of business is outside the UK and which is not resident in the UK will usually have its place of abode outside the UK, and will therefore be subject to UK withholding tax on the receipt of interest arising in the UK (interest will typically arise in the UK if the payer is UK tax resident or a UK incorporated company).

If the bank has a UK permanent establishment in the UK which is within the charge to UK corporation tax, the bank’s usual place of abode is likely to be treated as the UK.

What are the key exemptions?

There are a number of exemptions to the UK withholding tax requirement, including where the interest is:

• paid on a qualifying private placement - this is the “qualifying private placement exemption”;
• payable on an advance from a bank if, at the time when the payment is made, the person beneficially entitled to the interest is within the charge to UK corporation tax in relation to the interest;
• paid by a bank in the ordinary course of its business;
• paid by a local authority, company or partnership (of which a company or local authority is a member) and the recipient of the interest is a UK resident company or a non-resident company that carries on a trade in the UK through a permanent establishment;
• paid on a quoted Eurobond; or
• an interest distribution of certain open-ended investment companies and authorised unit trusts or a dividend paid by an investment trust.

What is the qualifying private placement exemption (the QPP Exemption)?

The QPP Exemption is a full exemption from the UK withholding tax requirement on payments of yearly interest and is likely to be of particular relevance to international banks. The purpose of the introduction of the exemption back in 2016 was to encourage debt investment from overseas into the UK.

It applies to an interest payment made on a “qualifying private placement”, which is a security which:

• represents a loan relationship to which a company is a party as a borrower;
• is not listed on a recognised stock exchange;
• has a term that does not exceed 50 years; and
• either (a) had a minimum value of £10 million at the time the security was entered into, or (b) where the security had a lower value at the time it was entered into but was comprised in a single placement with other relevant securities to the same borrower, the placement had a minimum value of £10 million.

What are the key conditions to satisfy?

In addition to the conditions relating to the security itself as outlined above, there are a number of further conditions which must be satisfied in order for the QPP Exemption to apply.

These conditions require that:

• the security was entered into by the borrower for genuine commercial reasons, and not as part of a tax advantage scheme;
• the borrower reasonably believes that it is not connected to the lender; and
• the borrower has received a creditor certificate from the lender.

What is a creditor certificate?

A creditor certificate is a written statement in which the lender confirms to the borrower that it is a resident of a qualifying territory and that it is beneficially entitled to the interest on the security for genuine commercial reasons (and not as part of a tax advantage scheme).

Broadly, a lender will be a resident of a qualifying territory for the purposes of the QPP Exemption if it is: (a) a resident of the UK; or (b) a resident of a territory with which the UK has a double taxation arrangement and that arrangement includes a non-discrimination provision.

There is no specific form that the creditor certificate must take.

Is HMRC required to approve the application of the QPP Exemption?

No. There is no requirement for HMRC to approve the application of the QPP Exemption. Therefore, if the conditions applying to the QPP Exemption are satisfied, the exemption will apply automatically and the interest payable by the borrower to the lender in relation to the relevant security can be paid gross to the lender.

However, HMRC has the power, by notice to the borrower, to require the borrower to produce a creditor certificate in relation to any interest paid by it. If the borrower fails to produce the certificate to HMRC within the time period specified by HMRC in the notice or HMRC reasonably believes that a creditor certificate produced by the borrower is materially inaccurate, then HMRC can notify the borrower that the certificate has no effect from the date the notification is received by the borrower.

How does the QPP Exemption differ from double tax treaty relief?

Although double tax treaty relief would typically provide relief for lenders from UK withholding tax on UK source interest, tax treaty relief does not always provide a full exemption from withholding tax. For example, the UK’s double tax treaties with Italy and Australia provide only for a reduced rate of UK tax withholding on interest payments of 10%. Accordingly, since the QPP Exemption provides for a full exemption from withholding, it may be preferable for a borrower and lender to meet the requirements of the exemption than to seek treaty relief.

Further, for treaty relief, there is a requirement that the UK borrower applies to HMRC for authorisation that interest can be paid without withholding where double tax treaty relief is sought. Accordingly, it may be administratively more efficient for a borrower and lender to satisfy the requirements of the QPP Exemption for withholding tax relief than to seek double tax treaty withholding tax relief.

What happens if the lender fails to meet the requirements for the relief?

If the lender, at any time after it has issued a creditor certificate to the borrower, ceases to meet the relief requirements, it must notify the borrower. This means that the creditor certificate will be of no effect and any interest paid by the borrower to the lender from the day after the date on which the notification is received will be subject to UK withholding tax (unless another exemption, or double tax treaty relief, applies).

TLT comment

Although the QPP Exemption was introduced almost a decade ago, it is not widely known about and international banks are more likely to look to double tax treaties with the UK for relief from interest withholding.

However, the QPP Exemption can be potentially useful for overseas lenders as it has advantages over the relief potentially available under double tax treaties both in terms of the scope of the exemption and the simplicity of administration.

Overseas lenders receiving interest payments from UK borrowers should consider if the exemption applies and, if it does, both the lender and borrower should ensure that the loan documentation is carefully drafted to address the requirements of the exemption. Lenders should not overlook the ongoing obligation to ensure that the requirements of any creditor certificate are satisfied during any period in which UK interest will be payable.

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