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Tax treaty relief: HMRC Syndicated Loan Scheme
Practical Law UK Legal Update 9-503-4335 (Approx. 3 pages)
Tax treaty relief: HMRC Syndicated Loan Scheme
by Adam Willman, Norton Rose LLP
| Published on 01 Oct 2010 |
This article is part of the PLC Global Finance September 2010 e-mail update for the United Kingdom.
Speedread
From 1 September 2010, HMRC's guidance relating to streamlined treaty relief for syndicated loans has been reissued as the Syndicated Loan Scheme (SLS). Where certain payments of interest are made from UK borrowers to lenders in other jurisdictions, any UK withholding tax may be reduced or eliminated pursuant to a relevant double tax treaty, provided clearance is first received from HMRC.
From 1 September 2010, HMRC's guidance relating to streamlined treaty relief for syndicated loans has been reissued as the Syndicated Loan Scheme (SLS). Where certain payments of interest are made from UK borrowers to lenders in other jurisdictions, any UK withholding tax may be reduced or eliminated pursuant to a relevant double tax treaty, provided clearance is first received from HMRC.
The formal treaty clearance process involves certificated claims from all foreign lenders and takes some time to complete. In 1999, in order to mitigate the borrower's cost of paying interest during this period, the Provisional Treaty Relief Scheme (PTRS) was introduced to allow the borrower "temporary" permission to pay interest at the reduced or nil rate pending the outcome of the formal clearance application. The scheme was restricted to two situations:
- A single non-UK lender and an unconnected UK corporate borrower (a one-to-one loan).
- Where there were multiple non-UK corporate lenders with a syndicate manager (SM) acting on their behalf, and an unconnected UK borrower (a syndicated loan).
From 1 September 2010, HMRC discontinued the PTRS for one-to-one loans and replaced it with the Double Tax Treaty Passport Scheme. (See DTTPS). For syndicated loans, the substance of the PTRS remains in place but has been reissued as the SLS.
What is the SLS?
The SLS is a working arrangement that allows the SM to apply for withholding tax relief and provide the associated necessary information to HMRC on behalf of all qualifying lenders in the syndicate, the SM generally acting as the main channel for communications. The application details the lenders in "blocks" according to the rate of treaty relief. If HMRC is happy for a syndicate to be accepted into the SLS, it will issue a formal direction to each UK borrower that it can pay interest gross or with the appropriate reduced deduction (as the case may be). The SLS includes a procedure for existing syndicates whose members have already individually obtained directions, to enter the SLS upon a new member joining the syndicate.
The SLS does not apply to "see-through" entities (such as US limited liability companies or partnerships) which must make their own applications. However, if "see-through" entities are providing less than 20% of the total value of the loan and make up less than 20% of the total number of lenders, an SM may continue to make an application on behalf of the other lenders. Periodically, HMRC may review the members of a syndicate and request an SM to provide details of the arrangements in place to meet its SLS undertakings.
SLS v PTRS: the main differences
The SLS Guidelines for syndicates are very similar to those for the PTRS with a number of small changes:
- The SLS Guidelines include a section detailing the necessary commitment required of the syndicate and the SM. For example, HMRC expects a syndicate's participation in the SLS to be a long-term venture. Where there is evidence to the contrary, HMRC may decline to accept a syndicate into the SLS.
- HMRC will issue a formal direction to each UK borrower at the outset. Previously HMRC issued the SM with a provisional letter of acceptance which the SM then had to copy to each lender.
- The application forms for an SM to apply for authorisation to enter the SLS remain largely unchanged, although they have been updated and made more user-friendly.
- The SLS application form requires the SM to include an additional block containing lenders which are "treaty passport holders" under the new DTTPS (as long as the SM is satisfied that the lender so qualifies).
- As mentioned above, HMRC will continue to conduct periodic reviews of the membership of individual syndicates and the arrangements that SMs have made to meet their SLS undertakings. However, the previous timetabling for such reviews has not been repeated in the SLS Guidance.
Conclusion
The SLS will help to reduce the compliance burden for UK borrowers and foreign lenders in syndicates wishing to obtain UK treaty relief clearance, which in recent times has been a cumbersome and time-consuming process. It is to be hoped that this new process will allow UK borrowers to be able to enter into loans with non-UK banks without having to worry about potentially having to gross up for withholding tax, if treaty clearance is delayed.