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HMRC internal manual

International Manual

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HM Revenue & Customs
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Double Taxation applications and claims: Indofood: Impact on particular cases

Capital market transactions involving Special Purpose Vehicles (SPVs)

  1. Many capital market transactions involve SPVs which may not satisfy the test of beneficial ownership under an “international fiscal meaning”. Securitisation programmes, for example, in respect of mortgage backed loans and other debt receivables are commonplace ways of raising finance. Typically such programmes involve a SPV which issues bonds to third party investors and employs the proceeds from the bonds to purchase the receivables or debt secured on the receivables (see below where these are quoted Eurobonds). The SPV is typically required to pass on the income received from the underlying assets to the bondholders (subject to hedging arrangements and less a small spread to cover fees etc). Where the SPV is resident outside the UK, an application will have to be made by the non-resident to enable the interest that is backed by the receivables to be paid gross to the SPV. The SPV in such an arrangement may not be the beneficial owner of the income under the international fiscal meaning; it often has very narrow powers over the income and its obligations to the bondholder mean that it is unlikely to ‘enjoy the full privilege to directly benefit from the income’.
  2. However, as indicated above in applying the beneficial ownership concept in the context of Double Taxation Conventions (DTCs), regard should be had to the objective of the DTC. Where there is no abuse of the DTC, there is no need, in practice, to apply the “international fiscal meaning” of beneficial ownership. The object of the treaty is likely to be met just as easily using the UK domestic law meaning of beneficial ownership.
  3. HMRC will also accept that there is no need to invoke the “international fiscal meaning” of beneficial ownership to deny treaty benefits where the lender receiving income directly from the SPV (the “true” beneficial owner of the interest) would, if they had been the direct recipient of the interest, have been entitled to treaty benefits as a resident of a state with which the UK has a DTC with zero withholding on interest. It is not necessary for the beneficial lender in this scenario to have made a formal claim for treaty benefits in order to assess what entitlement to claim would have arisen.

Quoted Eurobonds

  1. Many of the transactions involve SPVs issuing Quoted Eurobonds. No UK withholding tax is payable on interest from Quoted Eurobonds so no treaty claim is needed.
  2. HMRC therefore accept that the question of invoking the “international fiscal meaning” of beneficial ownership to deny treaty benefits will not arise where the bond issued by the non-resident SPV is a Eurobond as defined in ITA07/S987 (formerly ICTA88/S349(4)).

Funds investing in UK loans

  1. A recent capital market development has been the establishment of various types of European-based funds that purchase loans to UK borrowers. Funds of this type include Collateralised Debt Obligations (CDOs) and Collateralised Loan Obligations (CLOs) in addition to mezzanine funds. They will typically own a portfolio of assets and issue several classes of securities whose performance reflects the performance of the underlying assets. For a number of reasons such funds may not be resident in the UK. They are therefore required to make treaty applications to receive the interest of the purchased loan assets without deduction of tax.
  2. As with securitisation SPVs, many of these arrangements may not satisfy the test of beneficial ownership under an “international fiscal meaning”. The fund often has very narrow powers over the income and its obligations to the investors in the securities mean that it is unlikely to ‘enjoy the full privilege to directly benefit from the income’. It may therefore appear that such funds would be denied treaty benefits under the “international fiscal meaning” of beneficial ownership.
  3. However, as indicated above, in applying the beneficial ownership concept in the context of DTCs regard should be had to the object of the DTC. Where there is no abuse of the DTC, there is no need, in practice, to apply the “international fiscal meaning” of beneficial ownership. The object of the treaty is likely to be met just as easily using the UK domestic meaning.
  4. As with securitisation SPVs, many of these types of transactions involve Quoted Eurobonds. For the reasons set out above, the intervention of the non-UK SPV does not reduce the level of UK withholding tax. HMRC will therefore accept that there is no need to invoke the “international fiscal meaning” of beneficial ownership to deny treaty benefits where the bond issued by the non-resident SPV is a Quoted Eurobond as defined in ITAO7/S987.

Syndication and sub participation

  1. A loan which is made as a normal part of banking business and which is subsequently subject to sub-participation, again in the ordinary course of banking business, is unlikely to have been so structured with the aim of taking advantage of treaty benefits. Subsequent participation will not cause HMRC to change its view on the application of the “international fiscal meaning” to the original lending.
  2. However treaty abuse would arise where lenders who would not be entitled to treaty benefits, arrange for the loan to be initiated via a bank lender in a treaty country. HMRC does not consider this to be normal commercial syndication as part of the ordinary course of banking business - the interposition of the bank lender merely serves to gain treaty benefits that would not otherwise have accrued.
  3. Examples of the application of the HMRC view are included at INTM332080. These are illustrative only and should not be taken as limiting the circumstances in which HMRC will apply the “international definition”.
  4. The general principle underlying HMRC interpretation is that treaty abuse will not normally arise where the interposition of an intermediate lender would not improve the withholding tax position of interest paid by the UK borrower, when compared to the withholding tax that would have arisen had that intermediate lender not been interposed. Cases falling outside the examples would need to be considered on an individual basis.