Double Tax Treaty Passport Scheme

HM Revenue & Customs have launched a new process for getting treaty clearance to pay interest gross to non-UK lenders.

Obtaining clearance to pay loan interest gross has always been a tedious and cumbersome process and even the Provisional Treaty Relief Scheme seemed to give little practical help. Keeping track of the status of lenders, especially where the syndicate make up changes through loan trading, can be a nightmare. For these reasons the ACT working together with the Loan Market Association started discussions with HMRC back in 2008 and proposed a form of passporting arrangement. After various public consultations during 2009 we have been pleased to see that the concept has been taken up with a new Double Tax Treaty Passport (DTTP) scheme opened for applications on 1 June, with a start date of 1 September 2010. Prior to the new scheme, a lender had to make a separate treaty application for each loan it grants/acquires. The application needs to be certified by its home tax authority and then filed with HMRC – this process typically takes several months (but delays of a year or more are not uncommon). During this time, the borrower must continue to withhold tax. If all goes well, treaty clearance is granted, and the tax withheld can be reclaimed, but the delay and cashflow cost can prove problematic. The new DTTP scheme will work such that:

• a lender will be able (but not required) to apply for a treaty "passport";
• if accepted, the lender will be allocated a unique DTTP reference and included on a public register of Passport holders with each passport valid for five years. HMRC undertakes to deal with any application within 30 working days;
• the register will be published on the HMRC website;
• when a loan is entered into a the lender can notify the borrower of its passport status or the borrower can check this from the HMRC website. The UK corporate borrower may then enter into the loan with an expectation that interest payments made under will attract relief from withholding tax at a rate appropriate to the relevant double taxation arrangements then in force.
• the borrower still has to notify HMRC (within 30 days if to be effective from the start of the loan) who will in turn grant clearance by issuing a direction (as has been previous practice) to the borrower to pay without withholding;
• HMRC should be able to issue a gross payment direction "as soon as is practicable" (probably after around three weeks).

The Scheme is not compulsory, and lenders may opt to continue to use the previous gross payment clearance application system. Existing clearances are not affected. HMRC weblinks:

• HMRC: Double Taxation Treaty Passport scheme (1 June 2010) http://www.hmrc.gov.uk/cnr/dtt-passport-scheme.htm ("A new Double Taxation Treaty Passport scheme for overseas company lenders is to be launched.")
• HMRC DT Treaty Passport Scheme Operational overview http://www.hmrc.gov.uk/cnr/dttp-overview.pdf
• Frequently Asked Questions Arising From Launch Meeting http://www.hmrc.gov.uk/cnr/dttp-faqs.pdf
• Terms and Conditions http://www.hmrc.gov.uk/cnr/dttp-terms.pdf
• DTTP1 - Application for a Double Taxation Treaty Passport http://www.hmrc.gov.uk/cnr/dttp-application.pdf
• ACT/LMA submission to HMRC - April 2009 http://www.treasurers.org/withholdingtax

Slaughter and May briefing regarding the DTTP scheme, from the corporate borrower perspective, including implications for loan agreements.The HMRC Double Taxation Treaty Passport: Slaughter and May