On 1 January 2016, a new exemption from UK withholding tax for interest paid on “qualifying private placements” came into force.
The conditions to the new exemption focus on various attributes that HMRC consider to be typical of private placements.
The conditions as enacted are considerably simpler than those that were first proposed. This should make the exemption more accessible.
A new exemption from UK withholding tax for interest paid on “qualifying private placements” came into force on 1 January 2016, under the Income Tax Act 2007 (the ITA) as supplemented by the Qualifying Private Placement Regulations 2015 (SI 2015/2002) (the Regulations).
The new exemption is intended to provide a stimulus to the UK private placement market. It is aimed at transferable unlisted debt instruments that cannot benefit from the “quoted Eurobond exemption” and offers an alternative to double taxation treaty relief for non-UK investors. It enables direct lending from states with a double taxation treaty whether or not the treaty provides for a nil rate of withholding tax, and without making treaty claims. The exemption can also apply to UK investors.
Conditions to the exemption
New section 888A ITA sets out “gateway” conditions to the new exemption. Further conditions are set out in the Regulations.
The exemption applies to interest paid on a “qualifying private placement”.
A “qualifying private placement” is a security which:
i. represents a “loan relationship” to which a company is a party as debtor for UK corporation tax purposes; and
ii. is not listed on a “recognised stock exchange”.
As such, the debtor must be a company and the debt must be a “security”. The latter requirement has led to concerns that the new exemption might only apply to private placements that take the form of a note or bond, and not to private placements that take the form of a loan. However, HMRC has indicated that this is not the case and we are hopeful that HMRC will publish guidance to this effect over the next few months.
In addition to the gateway conditions, a qualifying private placement (referred to as a “relevant security” in the Regulations) must also satisfy the following conditions:
its term cannot exceed 50 years;
when entered into, it must have a minimum value of £10 million or, where it comprises a single placement with other relevant securities, the single placement must have a minimum value of £10 million;
it must be entered into by the relevant debtor for genuine commercial reasons, and not as part of a “tax advantage scheme”;
the relevant debtor must reasonably believe that it is not connected with the creditors; and
each creditor must furnish the relevant debtor with a “creditor certificate”, which is neither a “withdrawn certificate”, nor a “cancelled certificate” (see below).
A creditor must confirm in the “creditor certificate” that:
i. it is tax resident:
in the UK; or
in a territory with which the UK has a double taxation treaty with a non-discrimination article. Whilst this includes jurisdictions where the double taxation treaty with the UK does not provide for a nil rate of withholding tax, it will exclude jurisdictions with no double taxation treaty at all; and
ii. it is beneficially entitled to the interest on the relevant security for genuine commercial reasons and not as part of a “tax advantage scheme”.
The Regulations require a creditor to notify the relevant debtor as soon as practicable once it becomes aware that the confirmation given by it in the creditor certificate is no longer correct. The creditor certificate will then cease to have effect from the day after receipt of the notification (and become a “withdrawn certificate”).
The Regulations also allow HMRC to notify the relevant debtor if it reasonably believes that a creditor certificate is inaccurate in a material particular. In this case, that creditor certificate will have no effect on and from the date the notification is received (and will become a “cancelled certificate”).
It is good news that the conditions to the new exemption are far simpler than those that were initially proposed. In particular, there is no requirement for the creditor to be a regulated entity; the security does not need to have a three-year minimum term or pay interest at a normal commercial rate; and the debtor does not need to form part of a trading group.
Whilst the requirement for a creditor certificate has not been dropped entirely, the confirmations required from the creditor are now less onerous than those previously envisaged.
Our view is that the Regulations provide a clear basis on which to structure transactions which will benefit from the new exemption across the corporate, infrastructure and real estate sectors, among others.