Debt instruments that are privately placed and issued directly to institutional investors (such as insurance companies and funds) in the UK have historically been subject to withholding tax.

Reasons to reform

European investors account for a sizeable portion of the mature US market for the private placement of debt instruments. Investors in this market typically have many years' experience and enjoy highly refined credit review functions.

European corporates issuing debt instruments in the US market are often required to overcome procedural obstacles, such as US-centric model form documentation. They may also incur substantial swap costs. By comparison, the European private placement market is generally less well developed.

The Breedon Report, published in March 2012, identified significant untapped potential in the European market. Following its publication, an industry-wide initiative was launched. It was led by the Association of Corporate Treasurers (ACT) and aimed to increase the number of UK-based private placement investors, unlocking a new source of financing for mid-sized borrowers. As part of the initiative, the ACT recommended that certain longer term private placements should be exempt from the withholding tax requirements on payments of interest.

The Withholding Tax Exemption

The Treasury has now issued Regulations, which exempt payments of interest on certain loans and debt securities from UK withholding tax. The new exemption applies equally to existing loans as well as to new loans.

The conditions are as follows:

  1. The security must not be listed on a recognised stock exchange. Listed instruments are already exempt under section 882 ITA.
  2. The loan must be issued for a term of not more than 50 years;
  3. The loan must have a minimum value of £10 million;
  4. The loan must be made by an unconnected lender in a "qualifying territory" (being, broadly, the UK and any other jurisdiction which has a tax treaty with the UK which includes a "nondiscrimination article", i.e. most major taxing jurisdictions).
  5. The borrower must be a UK corporate;
  6. The lender must give a "creditor certificate", i.e. a written statement, to the UK corporate borrower to confirm that the lender:
    1. is resident in qualifying territory (as described above); and
    2. holds the relevant security for bona fide commercial reasons and not as part of a tax advantage scheme.

Consequences

The Regulations are significantly broader than expected or indicated by the original proposals but they will be useful in developing the European private placement market.

A lender in a qualifying territory can now give a "creditor certificate" (as set out in the Regulations) rather than having to claim treaty relief. This is likely to be an attractive alternative for a lender (which is not treaty passport scheme registered) as there is no need to wait for HMRC to process a treaty claim.