Private Placements and the Qualifying Private Placement Exemption

April 15, 2016

The new exemption from UK withholding tax will affect certain debt finance arrangements and the issuance of debt securities between foreign lenders or investors and UK corporate borrowers or issuers that operate in private placement markets.

New regulations took effect on 1 January 2016 in the United Kingdom that introduce a new exemption from UK withholding tax that is intended to apply to certain debt finance arrangements and the issuance of debt securities between foreign lenders or investors and UK corporate borrowers or issuers that operate in private placement markets. This new exemption is known as the Qualifying Private Placement Exemption (QPP Exemption). Relevant debt securities (including private placement notes) entered into before, on, or after 1 January 2016 could potentially qualify for the QPP Exemption.

The UK imposes an obligation on UK borrowers to withhold UK tax at the rate of 20% on a payment of interest to non-UK lenders. The obligation to withhold could also potentially apply to interest paid by a non-UK borrower to a non-UK lender if the interest has a UK source. There are some exemptions from the obligation to withhold, but not all of the exemptions are readily available to private placement investors. Hence, the UK withholding tax has been regarded somewhat as an obstacle to the UK private placement market.

For example, interest payable on a debt security that is listed on certain stock exchanges is exempt from UK withholding tax; that is generally not available in the context of a private placement. Instead, private placement investors have been relying on double tax treaties that provide for full exemption from UK withholding tax on payments of interest by UK borrowers. Some of the UK’s treaties do not provide for a full exemption, so investors in such jurisdictions can benefit only from a reduction in the rate of withholding tax. However, such reliance has not always been straightforward, particularly when a foreign investor is not a holder of a treaty “passport” under the HM Revenue & Customs (HMRC) double tax treaty passport scheme. Such investors must claim the exemption by making a traditional certified claim to HMRC, which can present certain time and administrative constraints. Traditional claims by US investors have sometimes taken more than nine months to be processed, and the tax should be withheld in that interim period.

The QPP Exemption was introduced to improve the access of UK companies to financing from overseas private sources. The UK government’s original intention was for this exemption to facilitate investments in midsize companies and infrastructure projects. However, following extensive discussions between the UK Treasury and industry participants on the scope of the exemption, the revised QPP Exemption is now capable of applying to a broader range of UK companies that wish to tap into the private placement market. One of the key advantages is that where the QPP Exemption applies, neither borrower nor lender needs to make any filings with HMRC.

The QPP Exemption will apply to a relevant debt security, provided that certain conditions relating to that debt security, investor, and borrower are satisfied. These include the following requirements.

  1. The debt security must
    1. not be listed on a recognised stock exchange,
    2. have a term no longer than 50 years,
    3. form part of a single placement with an initial aggregate minimum value of £10 million, and
    4. represent a loan relationship to which a company is a party as debtor.
  2. The borrower and investor cannot be connected.
  3. The borrower must have issued the security for genuine commercial reasons and not for tax avoidance purposes.
  4. Each investor under any security must provide to the borrower a certificate (a “creditor certificate”) confirming that
    1. it is a resident of a “qualifying territory” (i.e., a state with which the UK has a double tax treaty containing a nondiscrimination article—many of the UK’s treaties include such a provision, including specifically each of the US-UK, Canada-UK, and Japan-UK treaties) and
    2. it is beneficially entitled to the interest on the relevant security for genuine commercial reasons and not as part of a tax advantage scheme.

Where the QPP Exemption applies, in addition to the administrative advantages, one benefit is that some investors that could previously achieve only a partial exemption from withholding (e.g., lenders resident in Canada, Australia, or New Zealand) can now potentially obtain a full exemption irrespective of a limited relief available to them under the relevant double tax treaty.

Borrowers that are currently negotiating financing arrangements from private investors that could potentially qualify for the QPP Exemption should ensure that the borrowers receive a certificate from each investor with respect to each relevant debt security. Borrowers should also ensure that the contractual documentation includes appropriate provisions that protect them if a certificate is cancelled by HMRC (which may occur if HMRC believes that a certificate is inaccurate or a borrower fails to provide a copy of the certificate to HMRC on request) or withdrawn by an investor (e.g., where the investor becomes aware that it no longer satisfies the requirement listed in paragraph 4 earlier).

Some unanswered questions still await HMRC guidance about how the QPP Exemption applies in practice. Where the private placement consists of notes issued to each investor, each such note should be regarded as a separate debt security. The £10 million requirement needs to be satisfied in respect of the entire placement, not each individual security. Consequently, any investor lending less than £10 million may still qualify for the QPP Exemption, provided that the entire placement has a minimum value of £10 million (even if one or more other investors do not satisfy the requirements listed in paragraph 4 earlier). Although we do not expect this condition to cause any concerns related to typical private placements, private placements that have unusual features (e.g., multiple tranches that carry different terms) may cause difficulties with respect to the QPP Exemption if each tranche is treated as a separate placement that does not satisfy the £10 million requirement. There is no definition of when a borrowing constitutes a single placement—it appears to be an area where everyone knows a private placement when they see one, but no one knows specifically how to define it.

Another area of potential difficulty is the connection test. To assess connection, interests of lenders in their capacity as lenders would typically be disregarded, but particular attention should be paid to lenders that acquire rights to subscribe for equity (including warrants, equity kickers, or similar equity rights) alongside plain debt instruments.

Although the text of the regulations providing for the QPP Exemption is somewhat unclear, we understand from HMRC that the QPP Exemption is capable of applying not only to loan notes in addition to private placement notes, but also to a wider range of financing arrangements that include traditional loan agreements, such as syndicated loans. However, there is a risk that a loan agreement entered into with multiple lenders pursuant to a single placement may be regarded as a single “security”. If so, a failure by one lender to produce a certificate (e.g., that lender is in a jurisdiction with no treaty with the UK) could taint the entire loan, so that even otherwise qualifying lenders could not rely on the QPP Exemption. We hope that this question will be clarified with guidance that HMRC is expected to release soon.

Because the operation of QPP Exemption does not require any clearance or direction from HMRC, the introduction of this exemption is a welcome step towards simplifying the mechanism for obtaining UK withholding tax relief for private investors. Foreign private placement investors should review their current and prospective debt investments to determine if the QPP Exemption would be available to them.


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Kate Habershon
Katerina Heal
Thomas F. O’Connor