UK Trends and Developments Contributed by: Russell Warren and Michael Langan, King & Spalding LLP
• over 120 days spent in the UK – at least two ties. The five tie tests are, briefly: 1) a family tie – a spouse, civil partner or cohabiting partner or child (other than those in full-time educa - tion) are in the UK; 2) an accommodation tie – at least 91 days’ availability of accommodation in the UK of which at least one night is spent in the UK; 3) a work tie – at least 40 days worked (for more than three hours per day) in the UK; 4) a 90-day tie – more than 90 days spent in the UK in the previous two tax years; and 5) a country tie – the UK is the country in which you are present at midnight for the greatest number of days in the relevant tax year (this tie only applies if you have been resident in the UK for one or more of the previ - The UK imposes withholding tax on UK annual source interest at a rate of 20% (rising to 22% from 6 April 2027). Whether interest is UK source is a multifacto - rial test as set out in both HMRC guidance and case law. However, it is customary to treat interest pay - able by a UK guarantor or paid in respect of assets secured against UK real estate as UK-source interest. Generally speaking, in the case of UK guarantors, it is accepted that the interest would only be subject to UK withholding tax if the facility were to go into default and the guarantors were called upon to make interest payments (and in that scenario there are likely to be more significant concerns for the lender’s return than any withholding tax implications). The standard market approach in English law-gov - erned facility agreements (irrespective of whether it is a net asset value (NAV) facility, leveraged financing, acquisition financing or any other form of financing) is for any day one withholding tax risk to be borne by the lender, with the borrower on risk, broadly, for change of law or for failing to secure any withholding tax exemption where the lender has complied with any ous three tax years). UK Withholding Tax
procedural requirements. Conversely, the borrower takes risk on any change-of-law provisions. It is therefore of paramount importance for lenders to ensure that they are entitled to a full exemption from withholding tax to avoid any tax leakage in the trans - action. This is not typically a problem for domestic lenders due to exemptions for UK banks and entities which are subject to and which pay UK corporation tax. Similarly, given the UK’s wide network of double tax treaties, which often reduce the withholding tax from 20% to 0%, identifying an exemption through the relevant double tax treaty is in most cases straightfor - ward for overseas corporate lenders. Given the cumbersome process of making an applica - tion for treaty relief, HMRC introduced the treaty pass - port scheme in 2010 with the intention of streamlining this process. Under this scheme, lenders, following an application, are granted a treaty passport enabling them to benefit from the treaty rate of withholding tax, valid for five years. The borrower is then required to submit an application to HMRC to make interest pay - ments at the treaty rate. This is often straightforward but, as the borrower is legally required to withhold until receipt of a “gross payment direction” from HMRC, issues can arise where interest is payable shortly after completion given timing issues. In response to this, HMRC has again helpfully pro - vided guidance enabling the borrower to make inter - est payments at the relevant treaty rate from the date on which they receive acknowledgement from HMRC that the application has been received. Accordingly, it is accepted market practice that a borrower should pay the gross amount until receipt of this direction, although it is common for top-tier sponsors to push back on this and for a commercial discussion to ensue. In these cases, it is not uncommon for the par - ties to agree to defer interest payments until receipt of the direction. Alternatively, lenders are showing increasing inter - est in the UK’s qualifying private placement (QPP) exemption. This provides a day one exemption from withholding tax upon the provision of a creditor cer - tificate from the lender which confirms that it is resi - dent in a “qualifying territory”, meaning a territory with
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