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A new relief?

A recently announced new measure should provide further flexibility for those looking to raise UK finance by way of private placement. Norton Rose Fulbright's Matthew Hodkin dives into the details.

UK withholding tax on interest has always been a concern when financing projects in the UK and has typically placed some restrictions on the type of financing that can be obtained and the pool of available financiers. A recently announced new measure should provide further flexibility for those looking to raise finance by way of private placement. By this we meanthe placement of debt with a group of non-bank investors who are looking for alternative investment opportunities and preferring to hold debt for the entire term of the loan, often on a fixed or inflation linked basis.


Historically, the position in the UK has been that payments of interest are subject to withholding tax at 20%, but numerous exemptions are available. The typical exemptions that are used for loan finance are, broadly speaking:

• that the loan is advanced by a bank operating through its UK place of business
• that the loan is advanced by certain other types of UK lender (such as registered pension schemes or building societies)
• that the loan is advanced by a person resident in a jurisdiction that has a double tax treaty with the UK that provides for zero withholding tax on interest.

In the last of these cases, it is necessary to apply to HM Revenue & Customs (HMRC) for clearance before interest can be paid without withholding tax and this process can take time. It is also difficult for borrowers to manage administratively where lenders change as, each time a lender changes, a new treaty clearance application may need to be completed.

This means that syndicated loans can be managed provided the lenders are within the class of UK lenders that can be paid gross and, if it wishes to cast the net wider, provided the borrower is prepared to deal with the administration of treaty clearance applications.

The other route that can be taken is to list the debt. Interest on a “quoted eurobond” (ie a debt security listed on a recognised stock exchange) can be paid without withholding tax and without having to obtain HMRC clearance. The additional costs involved in obtaining and maintaining a listing as well as the initial and ongoing disclosure requirements may mean that issuers prefer not to go down this route.


In the Autumn Statement on 3 December 2014, the Chancellor announced a new exemption from UK withholding tax on “qualifying private placements”. This has been followed by an HMRC technical note setting out some more detail of the proposed changes. Further detail of the legislative drafting is still awaited, but it seems likely that any new exemption would not come into force until at least the second half of 2015.

As currently proposed, the new exemption will come with a number of restrictions and conditions which do limit its application. Some of these conditions relate to the issuer, some to the lender and some to the instrument itself:

The main condition applying to the issuer is that it must be a company that qualifies as a trading company rather than an investment company (using existing definitions within the UK tax legislation). There are also likely to be financial restrictions on the minimum size of a qualifying issuance and the overall maximum qualifying issuance that can be made by a company.

The conditions applying to the security itself are that:

• it must have a maturity date of between three and thirty years
• it must not be listed
• it must be unsubordinated to other unsecured debt
• it must pay interest at a normal commercial rate and have no right to conversion into shares in the issuer
• it must be issued in a minimum denomination of £100,000
The conditions apply to the holder are that:
• the holder must not be connected with the issuer
• the holder must be a UK-regulated financial institution or equivalent institution outside the UK
• the holder must be resident in a “qualifying territory”, which is broadly a territory with which the UK has a double taxation treaty with an appropriate non-discrimination article.

There will also be an anti-avoidance rule should the security not be issued and held for genuine commercial reasons, and a requirement that the holders certify on acquisition and regularly thereafter that they satisfy the conditions above.


Simply by avoiding the need for the borrower to complete treaty forms, this should enable borrowers to issue debt that can be circulated widely and this should reduce the administrative headache that has typically followed unlisted arrangements of this type. Nonetheless, borrowers will still need to police the identity of bondholders and ensure they have given the appropriate certifications before paying interest gross.

This should also enable issuances to those types of institution that cannot lend direct, but must hold bonds (such as certain types of pension fund) to invest in UK projects.
This should also enable financial institutions in jurisdictions that have double tax treaties with the UK but which do not reduce the withholding tax rate to zero (Italy being one such example) to participate in UK financings provided they meet the appropriate criteria.

However, the narrowness of the new exemption means that it will not be appropriate in all circumstances and so it remains to be seen how widely used the new rules will be and how this might further fuel non-bank lending as a source of funding for infrastructure projects.

Matthew Hodkin is a London-based tax partner at global law firm Norton Rose Fulbright