UK Law and Practice Contributed by: Fergus Wheeler, Paul Yin, Tracy Liu and Medha Vikram, Latham & Watkins
Sovereign immunity This public international law principle exempts certain foreign government entities from withholding tax on income earned in another country. Corporate-to-corporate This domestic exemption is available if the private credit lender is lending through a UK tax-resident company or a UK permanent establishment. 4.2 Other Taxes, Duties, Charges or Tax Considerations For private credit lenders using tax transparent vehi - cles, a key consideration is that, under the Loan Mar - ket Association (LMA) definition of “qualifying lender”, these vehicles are not considered “qualifying lenders” because they are not “beneficially entitled” to the inter - est. However, their ultimate partners or members are. The definition must therefore be amended to reflect this. If a lender is not a “qualifying lender”, it cannot benefit from change in law protection in respect of the gross-up. 4.3 Tax Concerns for Foreign Lenders Certain lending vehicles, particularly tax transparent vehicles, may not qualify for a DTTP. In these cases, a long-form certificated withholding tax treaty relief claim for each beneficial owner of the interest income is required, which can be time-consuming. If an interest payment is due before completion, the QPP exemption might be used as an alternative or short- term back-stop until HMRC grants treaty relief. The QPP exemption is theoretically administratively simple, requiring only a QPP certificate from the lender to the borrower. However, there is some market uncer - tainty around the interpretation of the regulations. If the QPP exemption is not viable as a back-stop, it may be possible to include an interest deferral mecha - nism in the facilities agreement allowing the borrower to defer payments until HMRC issues a gross payment direction.
4 (1) of the OECD model tax convention). If a private credit lender is lending through a tax transparent lend - ing vehicle – ie, where the partners or members of the entity are directly responsible for tax arising on the income or gains of the entity, the vehicle itself is not “liable to tax” in that contracting state for the pur - poses of that treaty and, therefore, will not be a “resi - dent” of that contracting state for those purposes. The application of the DTT to the vehicle would generally be denied. Beneficial owners of the interest received by the tax transparent lending vehicle should seek relief instead. The UK’s double tax treaty passport (DTTP) scheme allows expedited authorisation for non-UK lenders to receive UK source interest in line with the DTT rate of withholding tax. To obtain a DTTP, the lender must provide a tax residence certificate from its home jurisdiction tax authority and seek confirmation from HMRC as to its entitlement to treaty benefits. Tax transparent lending vehicles can only use the DTTP scheme if all constituent beneficial owners of the income qualify for the same DTT benefits under the same DTT. If they do not, the DTTP is not appli - cable and each beneficial owner will need to make a long-form certificated treaty relief claim. Not all DTTs offer complete exemption from withhold - ing tax and DTTP access can be complex, so other exemptions like the qualifying private placement (QPP) exemption should be considered. Domestic Exemptions QPP Conditions relating to the lender, borrower and terms of the debt (eg, a debt term under 50 years and at least GBP10 million (can comprise a placement of several debt securities)) will need to be satisfied. The lender (or its partners on its behalf) must make sev - eral confirmations, including residence in a “qualify - ing territory” with a DTT with the UK that includes a non-discrimination clause and the borrower must not be connected to the lender. The latter requires careful consideration if the private credit lender is participat - ing in a loan by the main fund’s lending vehicle.
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