Guidance

Double Taxation Relief: interest paid to overseas company syndicates

Updated 13 October 2021

1. Introduction

In 1999, the Provisional Treaty Relief Scheme was introduced to help speed up the UK’s double taxation treaty relief process involving UK-source payments of interest. It covered 2 particular types of loan situations:

• syndicated loans where the overseas lending members are corporations, and where a Syndicate Manager acts on behalf of all the members of the syndicate
• one-to-one loans for low-risk loans made by a single overseas lender to an unconnected UK corporate borrower, where there is no common shareholding or ownership between the parties to the loan

Following changes in 2007 to HM Revenue and Customs’ (HMRC’s) treaty relief processes and the subsequent introduction of the Double Taxation Treaty Passport Scheme, the one-to-one loan aspect of the Provisional Treaty Relief Scheme are no longer needed. This part of the Provisional Treaty Relief Scheme will therefore be discontinued with effect from 1 September 2010. The part of the Provisional Treaty Relief Scheme dealing with syndicated loans is being retained under the name of the Syndicated Loan Scheme. These are the guidelines for the Syndicated Loan Scheme.

2. Overview

The Syndicated Loan Scheme is designed to provide an efficient and unified mechanism for giving relief from withholding tax deductible on interest paid to the lending members of a syndicate who are resident in countries which have double taxation arrangements with the UK providing for such relief. It should be rare to find connections between the 2 sides to a syndicated loan raised on the open market. Where lenders are concerned, such syndicated debt-rights are commonly traded on commercial terms between the banks and similar concerns that usually make up such syndicates, in what has been termed ‘the secondary loan market’. This implied arm’s-length distance between the parties is a primary consideration behind HMRC’s willingness to moderate the strict rule that such changes in beneficial ownership require a fresh application for treaty relief from the new member of the syndicate.

For a syndicate to be allowed into the Syndicated Loan Scheme, it is essential that there is no relationship between the UK borrower and any lending member of the syndicate other than that of borrower and lender, and that the loan is on full arm’s-length terms. If these criteria are satisfied, HMRC is prepared to waive the requirement that each overseas lending member must make a separate application for Double Taxation Relief. Instead, HMRC is prepared to consider a single application from the Syndicate Manager acting on behalf of the syndicate, with the Syndicate Manager assuming appropriate representational and oversight responsibilities.

3. The Syndicate Manager

The Syndicate Manager is treated as acting for and on behalf of the syndicate’s lending members. The focus is on the loan itself.

With these considerations in mind, HMRC will accept a single composite application from a Syndicate Manager in the name of a new syndicate. With this composite application, HMRC will expect the Syndicate Manager to give them enough information about the loan, and all those initially party to it.

HMRC will regard the Syndicate Manager as the main channel for communications between HMRC and the syndicate members, and as the primary source of information concerning any changes in participation, or variations to the underlying terms of the loan.

For Syndicated Loan Scheme purposes, HMRC is willing to treat not only professional agent banks as ‘Syndicate Managers’. HMRC will also accept as a Syndicate Manager a UK borrower (or its professional agents) who satisfies HMRC that it’s competent to act for the lending members of the syndicate and is able to comply fully with the requirement to provide information to HMRC about changes to those lending members. This will require HMRC to place great reliance on the information provided by the Syndicate Manager, while recognising that this will be no more than that represented to the Syndicate Manager by the syndicate members. HMRC expects no more from the Syndicate Manager than that they’ll supply the information obtained in good faith from the syndicate members.

It is always possible that - despite the Syndicate Manager doing all that is asked of them - an application might fail. This would usually be as a consequence of the presence of factors not readily or reasonably within the knowledge of the Syndicate Manager - such as a community of interest between a lender and the borrower, which invokes the ‘special relationship’ provisions of a treaty. It’s important to remember from the outset that if relief is not found to be due as claimed, HMRC will look to the UK payer for the tax that ought to have been deducted. Again, it will be a matter for the parties to the loan to make their own contractual and other arrangements to safeguard themselves against the consequences of any failure.

4. Commitment of the syndicate and Syndicate Manager to the Syndicated Loan Scheme

With the Syndicated Loan Scheme, HMRC asks for and requires a level of commitment from the Syndicate Manager judged to be commensurate with the potential revenue risks to the UK Exchequer set against the easing of compliance burdens on non-resident lending members of a syndicate.

It will be the responsibility of a syndicate and its Syndicate Manager to weigh up all these factors and the potential exposure it might involve them in before deciding to go down the Syndicated Loan Scheme route. HMRC asks them to assume the responsibilities incumbent in seeking Syndicated Loan Scheme cover willingly and wholeheartedly, and with the consent and participation of all involved in the syndicate – both lenders and borrowers.

HMRC considers that it may reasonably expect such a commitment - especially by the Syndicate Manager - from the outset as being for the lifetime of the loan’s participation in the Syndicated Loan Scheme. And that it is the syndicate’s intention that participation in the Syndicated Loan Scheme will itself be a long-term venture.

HMRC will treat any evidence to the contrary on either ground as sufficient reason for declining to accept a syndicate into the Syndicated Loan Scheme.

5. Lending members of the syndicate

The Syndicated Loan Scheme is intended to cover only those lending members of a syndicate able to qualify under any double taxation arrangement as corporations.

Relief from withholding tax under the Syndicated Loan Scheme is not available to any of the lending members of the syndicate which are, for example, see-through concerns such as US limited liability companies or partnerships.

Where a syndicate includes lending members which are not straightforward corporations the syndicate manager may, nonetheless, make an application to include a loan into the scheme. In these cases the following additional conditions apply:

• no more than 20% of the total value of the loan may be held by partnerships or limited liability companies
• partnerships and limited liability companies may make up no more than 20% of the total number of lending members in a syndicate
• UK tax should be deducted from any interest that is owned by a partnership or limited liability company
• each partnership or limited liability company limited liability company is required to make a separate, formal application for Double Taxation Relief
• when a partnership or limited liability company establishes that all of its partners or members are able to benefit from the terms of a double taxation convention, HMRC will consider if it is possible to issue a SI 1970 No488 Direction to the payer of the interest in respect of interest payments that are paid to the partnership or limited liability company
• if tax is deducted from interest payments the partnership or limited liability company, (and not the syndicate) must claim repayment of that tax from HMRC

6. Initiating the Syndicated Loan Scheme process

The syndicate manager should complete form SLS-SM1 Syndicated loans – application by a Syndicate Manager of an new syndicate and send it to HMRC. You can obtain alternatively copies be contacting HMRC by Telephone: 03000 547584 or Fax: 0115 974 0666.

This form asks for a summary of the main elements of the loan. It also requires a declaration and assurance that the Syndicate Manager is acting with the authority in this matter of all of the lending members of the syndicate. The Syndicate Manager undertakes to provide all the information that might be required by HMRC to process the application, including copies of relevant loan documentation.

7. Country-specific ‘blocks’ of lending members

Where a syndicate contains lending members from more than 1 overseas country, the rate of treaty relief may vary, depending on the terms of individual double taxation agreements. In addition, there may be members for whom treaty relief is inappropriate (an ITA2007/S991 UK bank, for example), or for whom it is unavailable (for example, a resident of a country with which the UK has no arrangements in place to relieve interest payments).

In such cases, HMRC asks Syndicate Managers to group and list lending members’ details country by country, as a simple and efficient way of ordering the factual information given to them by those members. If any lending members are ‘treaty passport holders’ under HMRC’s Double Taxation Treaty Passport Scheme, and their status as such has been demonstrated to the Syndicate Manager, it would be highly desirable for this fact to be indicated in the listing – for example, by the use of an abbreviation like ‘Double Taxation Treaty Passport holder’.

In accepting a double taxation treaty passport holder as a lending member of a syndicate, a Syndicate Manager does not need to send HMRC a notification of this to HMRC like a borrower in a one-to-one loan. This is because the way in which Double Taxation Relief is authorised in different ways for syndicates and one-to-one borrowers. The notification that HMRC gets from a one-to-one borrower is used to prepare a Direction then issued to it to exempt the interest payments. But in a Syndicated Loan Scheme syndicated loan, it is the Syndicate Manager which is authorised on a continuing basis to manage and apportion Double Taxation Relief between qualifying blocks of lending members of the syndicate, without the need for a Direction relating to each such lender.

The country-specific ‘blocks’ should allow for complete transparency in following - and referring to - the separate income streams that are being given relief under different double taxation treaties.

It follows that sometimes more than 1 such list will attract the same rate of treaty relief. A list of Italian lending members will attract a reduced rate of 10% UK withholding tax - as may perhaps a list of Canadian members. A list of US members might be eligible for gross payments - as may that for French members.

The SI 1970/488 Direction HMRC issues will be couched in terms of these blocks, and they can group them together for the purpose of specifying which rate of treaty relief covers which blocks.

8. Listing ‘no relief’ and withholding tax inappropriate lending members

A separate Block should also be designated for any syndicate members who are not able to be paid interest without deduction of tax. Examples of lenders whose shares will be placed in this block include any:

• US partnership or limited liability company
• other non-corporate lender and any lender which is resident in a country without appropriate double taxation arrangements with the UK

Another Block should be reserved for any lending members who fall outside withholding tax considerations, chiefly those who qualify for gross payment of interest under the provisions of UK law.

9. Example

Below is an example of how the syndicate might designate the following as blocks:

• block A - for US residents (no deduction)
• block B - for German residents (no deduction)
• block C - for Canadian residents (10% deducted)
• block D - for the shares of any syndicate members resident in the UK (for example, ITA2007/S991 banks and companies to whom payment is made in accordance with the provisions at ITA2007/Part 15, Chapter 11)

10. Accepting a syndicate into the Syndicated Loan Scheme

If HMRC is happy for the syndicate to be accepted fully into the Syndicated Loan Scheme, they will issue a formal SI 1970/488 Direction to each UK payer. This will have a schedule setting out both:

• the UK payer(s) entitled to take advantage of the Syndicated Loan Scheme arrangements
• the overseas syndicate members for which it is applicable - grouped block by block, and specifying the rate of relief available to each block

If HMRC (for whatever reason) considers that the Syndicated Loan Scheme is inappropriate to the syndicate, HMRC will look to each UK payer to meet its obligation to account fully for any and all tax due.

11. Bringing existing syndicates into the Syndicated Loan Scheme

Existing loan syndicates, whose individual overseas lending members have already applied for and obtained SI 1970/488 Directions from HMRC to give treaty relief at source, might consider that the Syndicated Loan Scheme’s treatment of the syndicated loan as a unity would be of benefit to them. An example of this would be where secondary trading in debt-right is anticipated, and the new overseas lending member(s) would otherwise have to take the traditional certified application route before becoming entitled to relief at source.

HMRC is willing to consider applications from existing syndicates in these circumstances, but only where:

• a new overseas lending member has joined the syndicate and needs treaty relief
• they would meet the criteria for Syndicated Loan Scheme treatment under the normal rules for new syndicated loans
• there are no open unresolved applications for relief at source from the old members of the syndicate

The entry of the new lending member will be the ‘trigger’ for the Syndicate Manager to seek the admission of the loan into the Syndicated Loan Scheme.

The Syndicate Manager can do this by downloading and completing form Syndicated Loan Scheme-SM1A Syndicated loans - application by a Syndicate Manager of an existing syndicate. You can obtain alternatively copies be contacting HMRC by Telephone: 03000 547584 or Fax: 0115 974 0666.

In these cases you will also need to provide the HMRC references under which Double Taxation Relief was given to the old members of the syndicate. This information should enable HMRC to gain access to all of the information they need about the loan and the parties to it. If HMRC meets any difficulties then they’ll contact the Syndicate Manager for help. The form SLS-SM1A stands in its own right, and the new lending member(s) don’t need to apply for relief through their own tax authorities in the usual way.

In processing the syndicate’s application to join the Syndicated Loan Scheme, HMRC will take the opportunity of re-appraising the information they have about the loan, and the old and new syndicate members, liaising with other parts of HMRC and the Syndicate Manager as appropriate.

If the syndicate’s application is successful, HMRC will cancel all the current individual SI 1970/488 Directions and replace them with a single Direction covering the whole syndicated loan. Any further secondary loan transfers and lending member changes can be handled by both HMRC and the Syndicate Manager under the Syndicated Loan Scheme normal review and reporting arrangements.

12. Reporting of syndicate changes by a Syndicate Manager

The administrative burdens for both sides will be kept appropriately ‘light’.

A Syndicate Manager may want to place a syndicated loan into the Syndicated Loan Scheme before the syndicate’s membership has been extended beyond the loan’s original arrangers and co-arrangers. In which case, HMRC is willing to proceed with the application, provided the Syndicate Manager undertakes to provide details about the full ‘cast-list’ of syndicate members at the conclusion of this ‘primary syndication’ stage, when the syndicate may be said to be fully formed. The application form asks the Syndicate Manager to give an estimate of when the primary syndication will be concluded, so that the final composition of the syndicate can be confirmed to HMRC at the appropriate time.

Subsequently, the Syndicate Manager won’t be asked to notify HMRC automatically of every subsequent change in the syndicate’s membership, but only where these involve changes in the proportions of the interest payments attracting treaty relief at differing rates.

HMRC only expect the syndicate manager to volunteer information about secondary trading changes where this involved a transfer of debt-right from one rate of treaty relief to another. This means that HMRC doesn’t expect to be told of a transfer from one member of a block to another where the amount of relief given under the 2 treaties is the same (for example, from a US bank to a French bank, where full relief is granted under either treaty). But HMRC will want to know if the US bank sold on to (for example) a Canadian bank, as this means that the interest in question might no longer attract full relief - instead, under the UK/Canada treaty, the UK may be entitled to deduct tax at 10%.

When HMRC has been told of such changes, they can then issue an amended SI Direction to the UK borrower not only to reflect the factual and legal basis of the relief, but also to give the UK company the comfort and protection such an amended Direction would provide. Subject to HMRC being notified of changes within time, and being satisfied as to the Double Taxation Relief available, HMRC should be able to issue any revised SI Direction then called for to cover payments made from the date of the change or changes.

13. Material changes sufficient to terminate the Syndicated Loan Scheme cover

While the Syndicated Loan Scheme arrangements are designed to accommodate secondary trading and changes in syndicated debt-right, Syndicate Managers and participants should take particular care to remember that the intention of Syndicated Loan Scheme-routed relief is to cover payments to overseas corporate members only.

The assignment, sale or other transfer of Syndicated Loan Scheme relieved debt-right to overseas non-corporate parties will therefore constitute a fundamental material change sufficient to terminate the further application of the Syndicated Loan Scheme arrangements to the syndicate, with appropriate consequences for all payments made to non-resident lending members of the syndicate.

In cases of doubt, a Syndicate Manager should contact HMRC immediately.

14. Periodic review of individual syndicates

Periodically, HMRC will want confirmation of the membership of a syndicate - for example, at the preceding interest payment date. This might involve HMRC asking the Syndicate Manager to provide further information, such as copies of novation certificates. And if approaches to individual syndicate members are needed, HMRC will route these through the Syndicate Manager, so that they are kept fully in the picture.

15. Periodic Syndicate Manager review

From time to time, HMRC will want to learn about the detailed arrangements individual Syndicate Managers have in place to meet their Syndicated Loan Scheme undertakings, and how exactly this is done by reference to the Syndicate Manager’s standard operational practices for administering syndicates. HMRC intends, on a cyclical basis, to ask all participating Syndicate Managers to respond to this sort of review.

16. Loan documentation and confidentiality

A copy of the Loan Agreement must accompany the Syndicated Loan Scheme application, together with copies of any other documentation that throws light on the basis for both the loan and the case for Double Taxation Relief.

For example, agent banks will often already have their own pro-forma summaries in the shape of term sheets and administrative fact request forms. If a Syndicate Manager feels that these will usefully supplement the loan agreement, please copy these too.

Syndicate Managers must be ready to supply any other information or documentation that HMRC may consider they require in connection with the Syndicated Loan Scheme application or any time thereafter.

Bearing in mind considerations of commercial sensitivity. Please note that all information provided in connection with the Syndicated Loan Scheme will be covered by the normal very strict HMRC rules of taxpayer confidentiality.

HMRC will respect your right to business privacy, and will treat what you tell them as being in confidence.

17. Contact information

For further information you can contact HMRC at the following address:

Large Business — DTT Team
HM Revenue & Customs
BX9 1QR

Telephone: 03000 547584

If calling from outside the UK, Telephone: +44 3000 547584

Email: dttteam.lbnottingham@hmrc.gov.uk