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HMRC internal manual

International Manual

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Double Taxation applications and claims: Indofood: Examples of application

Example 1: Securitisation using offshore Special Purpose Vehicle (SPV) funded by listed bonds

As part of a securitisation arrangement, an SPV is established in Ireland. It purchases UK interest bearing receivables, funding itself with listed bonds which, if issued by a UK resident company, would qualify for exemption from withholding tax by virtue of the quoted Eurobond exemption at ITA07/S882 (formerly ICTA88/S349(3)(c)). The UK source interest is paid to the SPV which, in turn, pays interest to the bondholders who are resident in a variety of different countries.

The SPV is not the beneficial owner of the income within the “international fiscal meaning” of that phrase because it has only narrow powers over the income and its obligations to the bondholders mean that it is unlikely to ‘enjoy the full privilege to directly benefit from the income’.

But in these circumstances, it is unlikely that the purpose of the arrangement is the avoidance of UK withholding tax, since the UK withholding tax on the UK source interest is the same with the SPV (nil because of the terms of the UK/Ireland Double Taxation Convention (DTC) which provide for a zero rate of UK withholding tax on interest) as it is without the SPV (nil because of ITA07/S882.

Accordingly HMRC will not question the treaty claim required to eliminate the withholding tax otherwise payable on the UK interest paid to the SPV on the grounds that the SPV is not the beneficial owner of the income within the “international fiscal meaning” of that phrase.

In considering the purpose and effect of the interposing of an SPV, it is also necessary to look at other costs and activities of the SPV. However, expenses which are derived from the financing but which are incidental to the purpose of that financing (such as hedging costs) will not affect the HMRC view set out in this guidance.

Example 2: Securitisation using offshore SPV funded by combination of listed bonds and UK bank debt

The facts are the same as Example 1 except that the SPV also issues unlisted debt which is held by a UK financial institution sponsor.

As in Example 1, it is unlikely that the purpose of the arrangement is the avoidance of UK withholding tax since, again, the UK withholding tax on the UK source interest is the same with the SPV (nil because of the terms of the UK/Ireland DTC) as it is without the SPV (nil: partly because of ITA07/S882 and partly because of section ITA07/S879(1) (formerly ICTA88/S349(3)(a)).

As in Example 1, the SPV is not the beneficial owner of the income within the “international fiscal meaning” of that phrase. But, again, HMRC will not question the treaty claim required to eliminate the withholding tax otherwise payable on the UK interest paid to the SPV on the grounds that the SPV is not the beneficial owner of the income within the “international fiscal meaning” of that phrase.

Example 3: Securitisation using offshore SPV funded by combination of listed bonds and unlisted debt from resident of a “zero rate country”

The facts are the same as Example 1 except that the SPV also issues unlisted debt which is held by a US company.

As in Examples 1 and 2, the SPV is not the beneficial owner of the income within the “international fiscal meaning” of that phrase.

As in Examples 1 and 2, it is unlikely that the purpose of the arrangement is the avoidance of UK withholding tax, since, again, the UK withholding tax on the UK source interest is the same with the SPV (nil because of the terms of the UK/Ireland DTC) as it is without the SPV (nil: partly because of ITA07/S882 and partly because of the terms of the UK/US DTC which provide for a zero rate of UK withholding tax on interest).

But, again, HMRC will not question the treaty claim required to eliminate the withholding tax otherwise payable on the UK interest paid to the SPV on the grounds that the SPV is not the beneficial owner of the income within the “international fiscal meaning” of that phrase.

Example 4: Securitisation of non-corporate assets using offshore SPV

The facts are the same as Example 1 except that the assets being securitised are loans made by a UK bank to a partnership.

As in Examples 1, 2 and 3, the SPV is not the beneficial owner of the income within the “international fiscal meaning” of that phrase.

As in Examples 1, 2 and 3, it is unlikely that the purpose of the arrangement is the avoidance of UK withholding tax, since, again, the UK withholding tax on the UK source interest is the same with the SPV (nil because of the terms of the UK/Ireland DTC) as it is without the SPV (nil: partly because of ITA07/S882 and partly because of ITA07/S879(1).

But, again, HMRC will not question the treaty claim required to eliminate the withholding tax otherwise payable on the UK interest paid to the SPV on the grounds that the SPV is not the beneficial owner of the income within the “international fiscal meaning” of that phrase. The above principles would apply equally to collateralised loan arrangements - or indeed to any interest-bearing loans where the question of UK withholding tax is unaffected by the interposition of the intermediate lender.

Example 5: Access to US commercial paper market using US SPV

A US SPV is established to provide non-US borrowers with access to the US commercial paper market. On the instructions of a UK borrower, it issues discounted paper and passes the funds on to the UK borrower by way of an interest-bearing loan.

The SPV is not the beneficial owner of the income within the “international fiscal meaning” of that phrase because it has only narrow powers over the income and its obligations to the bondholders mean that it is unlikely to ‘enjoy the full privilege to directly benefit from the income’.

But in these circumstances, it is unlikely that the purpose of the arrangement is the avoidance of UK withholding tax, since the UK withholding tax on the UK source interest is the same with the SPV (nil because of the terms of the UK/US DTC which provide for a zero rate of UK withholding tax on interest) as it is without the SPV (nil because there is no UK withholding tax on discounts). HMRC will not question the treaty claim required to eliminate the withholding tax otherwise payable on the UK interest paid to the SPV on the grounds that the SPV is not the beneficial owner of the income within the “international fiscal meaning” of that phrase.

Example 6: Access to US commercial paper market using US and Irish SPVs

The facts are the same as in Example 5 except that the US SPV acts on instructions of an Irish SPV who is, in turn, acting for the UK borrower. The additional step is introduced to provide the UK borrower with the security that its funding needs will be met notwithstanding the state of the US market. To provide this security, the Irish SPV enters into arrangements with a UK bank that ensure the bank will provide funds if money cannot be raised at short notice from the US.

Neither SPV is beneficial owner of the relevant income within the “international fiscal meaning” of that phrase because both have only narrow powers over the income and their obligations to their creditors mean that they are unlikely to ‘enjoy the full privilege to directly benefit from the income’.

But in these circumstances, it is unlikely that the purpose of the arrangement is the avoidance of UK withholding tax. The UK withholding tax on the UK source interest is the same with the SPVs (nil because of the terms of the UK/US and UK/Ireland DTCs which provide for a zero rate of UK withholding tax on interest) as it is without the SPVs (nil partly because there is no UK withholding tax on discounts and partly because of ITA07/S878(1). HMRC will not question the treaty claim required to eliminate the withholding tax otherwise payable on the UK interest paid to the Irish SPV on the grounds that it is not the beneficial owner of the income within the “international fiscal meaning” of that phrase.

Example 7: Access to group-sourced funding from a Non treaty country using Luxembourg conduit company

A claim is made under the UK/Luxembourg DTA for relief from UK withholding tax in respect of a loan from a Luxembourg resident company (LuxCo) to a UK group borrower.

  • LuxCo was set up (or has been maintained in the group) specifically to deal with this intra group loan and is taxed on a small “turn” for administering loans;
  • the source of the loan is an affiliate in a territory with which the UK has no DTA (NoA Co)
  • the NoA Co/LuxCo loan agreement shows that this interest bearing loan was predetermined to be onlent to the UK
  • similarly, the interest payable by the UK on its loan from LuxCo is predetermined to be passed on to NoA Co.

The conduit company is not beneficial owner of the relevant income within the “international fiscal meaning”, because it has clear obligations to forward the interest to NoA Co.

The terms and conditions of the loan agreements show that the flow of income out of the UK is predestined to be passed on to NoA Co. It is clear that one of the main purposes of the Luxembourg company is to avoid the withholding tax which would be due on payments of interest to NoA Co. The interest will not benefit from the Luxembourg/UK treaty and tax will be withheld.

Example 8: Access to group-sourced funding from a Treaty country using Luxembourg conduit company

The facts are as in example 7 except that this time the source of the funds is a US taxpayer who receives interest directly from the Lux Company. If the interest had gone directly to the US recipient, it would have qualified for exemption under the US/UK treaty. Although the Lux Company will not satisfy the international fiscal meaning, this is irrelevant as its imposition into the arrangement does not affect the withholding tax position. The same conclusion could not be drawn if the US taxpayer had passed funds to a non treaty intermediary, which then lent the funds to the Lux Co.