Friday, 9 June 2017

United Kingdom: Scope of double taxation treaty passport scheme expanded

The UK government published its response to a consultation held on the “double taxation treaty passport” (DTTP) scheme on 20 March 2017, as well as a document that includes some new terms, conditions and guidance on the DTTP. The consultation was held in 2016 to explore whether the DTTP scheme still meets its purpose and whether the scope of the scheme should be expanded. The new guidance, which removes some restrictions under the DTTP scheme, applies to loans entered into on or after 6 April 2017.
Introduced in 2010, the DTTP is designed to provide a simpler process for foreign corporations lending to UK companies to obtain treaty clearance on loan interest payments and to eliminate the need to apply for clearance on the application of a lower withholding tax rate under an applicable treaty on a loan-by-loan basis. Under UK law, a 20% domestic withholding tax must be deducted from interest payments made to nonresidents unless the rate is reduced under an applicable tax treaty, and advance clearance is required from the UK tax authorities before a reduced rate of withholding can be applied. Before the introduction of the passport scheme, clearance was required for each loan, a cumbersome process that the UK tax authorities recognized could lead to delays before interest could be paid.
The scheme enables foreign companies lending to UK borrowers to obtain a DTTP, confirming that they meet the requirements of the relevant tax treaty with the UK. The effect of a DTTP is that the treaty rate should be available to all loans made by the foreign company, without the need to apply for advance clearance on each loan. Notably, the scheme is available only to lenders that are resident in a country that has concluded a tax treaty with the UK that provides relief at source on UK interest payable. If a “treaty passport” is granted, the lender can make multiple loans to UK borrowers by simply providing the details of the passport to the UK borrower (who then notifies the UK tax
authorities). Passports are valid for a five-year period, after which they may be renewed. The UK tax authorities maintain a public register of passport holders, which includes details on the overseas lenders.
Before the effective date of the new guidance, the DTTP scheme applied only where both the lender and the borrower were corporate entities, thus creating a burden for the foreign lender where loans were made to noncorporate UK borrowers. Under the updated guidance, the scheme is available to all UK borrowers that have an obligation to deduct withholding tax from interest payments, where a tax treaty applies, including UK partnerships, individuals and charities.
Transparent entities (including partnerships) will be admitted to the scheme as lenders where all of the constituent beneficial owners of the income are entitled to the same treaty benefits under the same treaty. Overseas partnerships can apply for a treaty passport if all partners are resident in the same jurisdiction and are entitled to the same treaty benefits. Sovereign wealth funds and pension funds that are relying on the withholding tax rates under a tax treaty also will be admitted as lenders.
Since the new guidance applies to loans entered into on or after 6 April 2017, loans obtained before that date will continue to be subject to the old rules, i.e. the passport scheme applies only to corporate-to-corporate loans.
Source: Deloitte