Exemption from withholding tax through private placements


Many non-UK resident lenders in the commercial property sphere will often have encountered the problem of UK withholding tax on interest at 20%.

As an alternative to the traditional double tax treaty relief method, the qualifying private placement is a relatively new method through which investors and lenders can be exempted from withholding tax on their interest income, thereby incentivising the private loan market.

If the loan does not take the form of a quoted Eurobond (meaning it must be listed on a recognised stock exchange), the most common way for a non-UK lender to receive interest on the loan free of tax has traditionally been for the lender to be resident in a territory which has a favourable double tax treaty with the UK. Under the treaty passport system, a lender can provide the UK resident borrower with its treaty passport number and the borrower can then use this to obtain permission from HMRC to pay interest under the loan gross (that is, without the withholding). If a lender does not have a treaty passport, there is the option of filling in the relevant paperwork for HMRC and the taxing authority in the lender’s territory in order to obtain the permission from HMRC to pay gross (though relief by this method usually takes some time to obtain).

The Qualifying Private Placement Regulations have been in force since 1 February 2016. They have streamlined the approach by enabling self-certification of the required status by the lender, and offer relief from withholding tax whether or not that lender territory’s treaty provides a nil rate of withholding tax and without the lender or borrower having to make a treaty claim.

In order for a placement to be qualifying and come within the ‘gateway’ of the regulations, there are basic two requirements:

  1. the borrower must generally be a company borrowing a sum of money as debtor for UK Corporation Tax purposes; and
  2. the debt must be a security which is not listed on a recognised stock exchange.

(The use of ‘security’ here is slightly confusing, but the industry and HMRC accept that simple loans as well as bonds and loan notes can be qualifying.)

In addition:

  • the term of the loan cannot exceed 50 years;
  • it must be for a minimum of £10 million;
  • it must be entered into by the borrower for ‘genuine commercial reasons’ and not ‘as part of a tax advantage scheme’;
  • the borrower must reasonably believe it is not connected to the lender; and
  • the lender must provide the borrower with a certificate confirming that:
    • it is tax resident either in the UK or in a tax territory which has a double tax treaty with the UK containing a non-discrimination article; and
    • it is beneficially entitled to the interest payable upon the qualifying security.

The borrower may pay interest gross if the above requirements are met. The lender must inform the borrower if it discovers that its certificate is defective, and HMRC can inform the borrower directly if this is the case.

The Qualifying Private Placement Regulations are becoming a more straightforward and popular method of arranging finance for non-UK lenders who wish to avoid having to pay UK withholding tax on their interest receipts.

Please speak to a member of our tax team for further information.

Anthony Reeves, Associate, Fladgate LLP (areeves@fladgate.com)

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