The qualifying private placement exemption in practice
The qualifying private placement exemption was introduced to enable lenders based in treaty jurisdictions to lend to UK borrowers without UK withholding tax on yearly interest payments. The intention was to bridge the gap between the quoted Eurobond exemption (and the expense and formalities of listing) and the availability of treaty relief from UK withholding tax.
Treaty relief does not always provide a solution to UK withholding tax: it can be difficult for certain non-bank lenders to meet the requirements of tax treaties, or they may be resident in a jurisdiction where the relevant treaty does not provide full exemption from UK withholding tax (such as China, Japan, Mexico, Italy, or Korea). The qualifying private placement exemption potentially opens up the UK market to lenders in these jurisdictions.
Broadly, the requirements for the exemption are that:
- the security must have a term not exceeding 50 years and a minimum value of £10m (or where the placement consists of several securities, the total value of the placement must have a value of at least £10m);
- the borrower must have a genuine commercial purpose for the loan;
- the borrower must reasonably believe that it is not connected to the lender; and
- the borrower must have received a “creditor certificate” confirming that the lender is resident in either the UK or a “qualifying territory”, meaning a territory with which the UK has a double tax treaty containing a non-discrimination article.
Notably, there is no requirement that the relevant treaty reduces withholding tax on interest to nil, so the exemption is potentially particularly helpful for lenders in Italy, for example, where the relevant treaty only reduces UK withholding to 10%.
Where the lender is a tax transparent partnership, the exemption can apply but it requires all the partners to be resident in a qualifying territory.
In practice, use of the exemption has been more limited than expected. In part this is because points of detail can cause difficulties with the exemption. For example disregarded US LLCs cannot give a creditor certificate (because they are not resident anywhere) and this can cause difficulties where the LLC is the GP of a lending partnership. There are also traps for the unwary where the lending is a security or note, rather than an LMA-style loan.
In our experience the exemption is perhaps most helpfully used as a fallback where there are timing pressures on applying for a treaty relief passport. For example a borrower can rely on a creditor certificate to make interest payments without withholding, and a lender can give a creditor certificate, if it is satisfied that it meets the conditions, even if its treaty relief passport has not yet been obtained. Now that delays at HMRC in obtaining treaty relief appear to be easing, it may be that the exemption is of less use going forward.