Traditionally, overseas companies lending money to UK companies with which the UK has a double tax treaty have to receive the interest payments net of UK tax and reclaim the tax from HMRC. The UK borrower then has to deduct withholding tax at 20%, while the amount due under the double tax agreement is often as little as 0%.
Application of the double tax agreement is not automatic and approval must be granted before a reduced rate can be applied. To do this, the company must make a claim, supported by evidence of the loan agreement or licence agreements and contracts for inter-company royalties.
Only the overseas corporation receiving the income can make the claim, which will be dealt with by HMRC. After completion, the form must be certified by the taxation authority of the overseas company’s country of residence to confirm that it is resident in that jurisdiction. This procedure must be followed for each loan and there are different application forms for each jurisdiction.
A quicker, simpler scheme, known as the Double Tax Treaty Passport Scheme, was introduced in September 2010 with the purpose of reducing claim paperwork and delays falling on overseas corporate lenders. It does this by replacing the traditional certified claim which requires certification by the tax authority in the lender’s residence state, with a shorter process, as outlined below. It can apply to any corporate lender resident in a country with which the UK has a double tax agreement that includes an interest article.
The old certification process is not being abolished and will still be in place for those who do not wish, or cannot use the new system, for example, individuals.
The overseas lending company can apply to HMRC for a ‘passport’, using form DTTP1. This can be available for any loans, intra-group or external, so it could apply to a treasury company resident in a treaty jurisdiction. Once the company’s application has been approved and the passport granted by HMRC, the holder will be entered on a publicly-available register with a unique ‘DTTP’ number. The register is available on the HMRC website.
The register can be consulted by a prospective UK borrower and if it enters into a loan agreement, the lender can notify the borrower of its Treaty Passport status and ‘DTTP number’.
The borrower must then notify HMRC within 30 days of the loan, using form DTTP2, giving details of the passport holder involved, the terms of the loan, the borrower’s contact details and the name and reference number of its tax office.
Loan documentation is not required in connection with a passport loan notification, but HMRC may request details of the loan, if it deems it necessary.
It is on this basis that the DTTP passport can be used, even where the lender and borrower are connected parties.
This system makes the process quicker and easier, but HMRC does reserve the right to decline an application for a passport or to refuse to apply it to a particular loan. In this situation, the lender and borrower will still have the certified claim process available to them to fall back on.