Investment trusts: interest distributions: gross interest distributions - reputable intermediary condition
Payment of interest distributions (for non-resident participants) to a reputable intermediary without deduction of tax - regulations 13 to 16 SI2009/2034
An investment trust (IT) or prospective investment trust (PIT) must pay interest distributions in respect of an individual who is not ordinarily resident, without deducting tax where the reputable intermediary test is satisfied in respect of the recipient (beneficial owner of shares in the investment trust company). There are three conditions, all of which must be fulfilled:
- the payment must be made to an intermediary that is a company
- that company must be subject to either the EC money laundering directive or to equivalent non-EC provisions, and
- the IT or PIT must have reasonable grounds for believing that the shareholder is not ordinarily resident in the UK.
A company is subject to the EC money laundering directive if it is a credit or financial institution as defined by Article 1 of Directive 91/308/EEC, as amended by directive 2001/97/EC. In the event of the directive ceasing to have effect or being further amended, the Treasury has powers to make consequential amendments.
The reputable intermediary condition is intended to recognise the practical difficulties that fund administrators might have in obtaining completed declaration forms (CTM47560) from shareholders where shares are placed through an intermediary with non-resident recipients. It seeks to take account of the ‘know your customer’ rules that an intermediary will have applied before placing an investment on behalf of a shareholder. It does not remove responsibility from the directors for ensuring that they have reasonable grounds for believing that a recipient is entitled to payment without deduction. However, where the conditions are met in respect of a shareholder, payments must be made without deduction of tax.
Examples of reasonable belief
The following examples may help to illustrate some of the circumstances in which interest distributions might be paid without deduction of tax on the grounds of reasonable belief.
- The intermediary has made to the IT or PIT a composite declaration that it holds the full names and addresses of all the persons for whom they are receiving interest distributions and that all are not ordinarily resident in the UK.
- The intermediary maintains and is able to provide a list of the names and principal addresses of the non-resident shareholders entitled to the interest distributions. The intermediary also has appropriate procedures in place to identify changes and eliminate shareholders who would no longer qualify for payment without deduction.
- The terms of the business between the IT or PIT and the intermediary require the intermediary to only place shares with shareholders who can satisfy the not-resident in the UK requirement for payment without deduction and the intermediary can provide factual evidence that this is the case.
- The IT or PIT has a class of shares, in respect of which interest distributions are to be made, that can only be marketed to persons who are not resident or not ordinarily resident in the UK and has or can obtain and provide factual evidence that this is the case.
Reasonable but mistaken belief
Where the IT or PIT has, in reliance on the reputable intermediary condition being satisfied, made an interest distribution without deducting tax it may be found that the reasonable belief that the recipient was not ordinarily resident was misplaced. In this case the income tax that ought to have been deducted may be recovered from the IT or PIT with interest thereon (regulation 16 SI 2009/2034).
If it is found that the IT or PIT did not have reasonable grounds for believing that the reputable intermediary condition had been met, but still made a payment without deducting tax, it may be liable to penalties as well as recovery of the tax and interest.