Exemption from withholding tax for private placements

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Lending into the UK is set to become easier for overseas investors thanks to the removal of UK withholding tax from interest paid to investors in ‘private placements’. These are a type of unlisted debt security. The UK government is keen to open up new and alternative sources of finance to small and medium-sized businesses. To this end, it is prepared to forgo its right to tax non-residents on their UK source income on these securities.

The tax is called withholding tax because the UK borrower is required to withhold it from the interest payable on the debt. Having withheld the tax, the UK borrower then has to pay it over to the UK tax authorities – as opposed to the tax being collected directly from the recipient. The effect is that the overseas lender receives interest after UK tax has been taken off. This UK tax will significantly reduce its return from the investment.

It is already the case that no withholding is imposed if the debt is listed on a stock exchange recognized by the UK tax authorities – but the cost and effort involved to obtain a listing mean that this is only really worthwhile if the issuer is a sizeable entity looking to borrow significant sums.

Similarly, there is no withholding tax if there is a suitable tax treaty between the UK and the lender’s jurisdiction. The UK does have an extensive treaty network but the claim process is burdensome and time-consuming. Furthermore, there are no tax treaties eliminating UK withholding tax with any of the recognised tax havens.

Under the new private placement exemption, neither a listing nor a treaty claim would be required. Private placement debt is defined as debt issued by a company, represented by a security and issued for a minimum of 3 years.

However, the UK government has proposed imposing some further conditions.

  • The issuer would have to be a trading company and the size of the issue would have to fall between minimum and maximum thresholds (to be determined but probably £10 million to £300 million).
  • The holder would have to be unconnected with the issuer, resident in a suitable treaty-jurisdiction (although not required to make a claim) and carrying on an authorised financial business.
  • The security would need to pay interest at a commercial rate and not be subordinated, convertible or part of a tax scheme.

In short, most debt issued by a UK trading company to most overseas investors with an authorised financial business could or could be structured to qualify for the exemption from withholding.

For those overseas investors who have held off making loans to UK borrowers, the time could be right to reconsider.