UK: UK’s New Administrative Regime for Treaty Relief in Respect of Corporate Interest Payments

Last Updated: 26 September 2010
Article by Andrew Terry

Many cross-border payments of UK-source interest are subject to deduction of tax at source under UK domestic tax laws, although many non-UK recipients of such interest are eligible to have their potential UK tax liabilities removed or reduced under the terms of one of the UK's numerous double tax treaties.

In principle, it is necessary for a formal application for treaty relief to be made before any UK-source interest can legitimately be paid to a non-UK party without deduction of tax at source by the paying party, and the same general administrative regime applies to both companies and individuals seeking treaty relief for cross-border interest payments. However, in the case of corporate lenders and borrowers the basic administrative system has been subjected to various modifications over time, and some significant changes to this modified system have been introduced with effect from 1 September 2010.

The new aspects of the UK's administrative system for treaty relief for cross-border corporate loans are summarised briefly below. Please note that these new approaches to tax administration only apply to withholding tax on interest and not to any withholding tax that might be applicable to cross-border payments of UK-source rent, royalties or (in those rare situations in which this is still a live issue in a UK context) dividends.

Please also bear in mind that, although a borrower has the primary administrative responsibility to deduct any UK tax that is properly deductible at source, it is the primary responsibility of the lender to seek any tax relief that may be available under the terms of an applicable double tax treaty. This is because it is the lender that is the taxpayer in respect of interest receivable, even though the borrower may be saddled with most of the accounting and reporting obligations of a taxpayer in a case involving a lender based outside the jurisdiction.

The new 'passport' scheme for foreign corporate lenders

It was already possible before September 2010 to obtain a form of provisional treaty relief for UK-source interest payments arising under certain types of cross-border corporate loan. But the aim of the UK's new passport scheme is to provide a more streamlined form of general pre-clearance for particular parties to lending arrangements, rather than particular loans.

Under the new administrative system (which formally commences as from 1 September 2010 but which has in fact already been operating informally for several months, so as to enable interested parties to seek relevant approval from the UK tax authorities) foreign corporate lenders may seek general advance approval from the UK tax authorities as bodies that are entitled to make applications for future UK-source interest on loans to be paid on a gross basis under the terms of an applicable double tax treaty.

The general idea is that an eligible body should submit to a single advance screening process as a result of which that body obtains a registration number that is included in a publicly available register maintained by the UK tax authorities. Any foreign corporate lender that is able to quote such a registration number to a UK-based corporate borrower is thereby entitled to make a streamlined application for the UK tax authorities to issue a formal direction to an affected borrower, enabling that borrower to make interest payments without deduction of UK tax at source.

Such a registration thus operates as a kind of general 'passport' to relevant tax treaty benefits for a defined period that is determined by the UK tax authorities. It seems that the usual period of validity will be five years, which is already the usual length of time for the validity of any formal directions issued by the tax authorities to a borrower in any particular case of treaty-based applications for relief from deduction of tax at source. However, it should be noted that the duration of validity of either a passport or a specific direction to pay gross interest is a matter which wholly lies within the general administrative discretion of the tax authorities; there is no specific legal right to claim the benefit of such facilities for any particular length of time.

Since the new passport regime only provides a streamlined administrative means of accessing the traditional system of obtaining double tax under tax treaties it is still necessary to ensure in any particular case, that a borrower is in fact properly authorised by the tax authorities to dispense with the basic requirement to deduct tax from cross-border interest payments.

This means that, once a particular passported loan has been entered into, both the lender and the borrower must submit prescribed application forms to the UK tax authorities within specified time limits, so as to notify the authorities that a particular cross-border loan has been entered into under the terms of the lender's passport. Formal approval of gross payment of interest is then granted (or, as the case may be, refused) in relation to each particular loan that has been notified to the tax authorities under the passport scheme.

Various conditions attach to the issue of a registration number under this new regime and various sanctions are available to the tax authorities in respect of non-compliance with relevant conditions. The ultimate sanction is expulsion of a foreign lender from the scheme, which would mean that an affected party then had to make wholly separate formal applications for tax relief under any applicable tax treaties in relation to any future interest payments due from UK-based borrowers.

The new administrative system is entirely optional and it still remains open to foreign corporate lenders from September 2010 onwards to seek specific approval of particular loans under the formal tax treaty mechanisms, either generally (i.e. without seeking any clearance at all under the new passport regime) or in relation to particular loans (i.e. after the lender has successfully obtained a passport but has decided, for some reason, not make use of that passport in a particular case, such as in relation to a loan which the lender had been advised to discuss with the tax authorities in views of doubts about its fundamental eligibility for treaty relief).

Nothing in the new regime removes or reduces the desirability of ensuring, from a lender's perspective, that a loan agreement contains comprehensive contractual protection against the possibility of deduction of tax by or on behalf of a borrower. Therefore, a general grossing-up clause should still always be included in any loan agreement that is drafted on behalf of a foreign corporate lender, whether or not passport eligibility is in issue. However, a borrower might wish to consider inserting a contractual requirement to the effect that a lender must use all reasonable endeavours to obtain and utilise a registration number under the new passport scheme, if there is any material risk that the failure to do so would increase the borrower's total exposure to the lender under the loan.

Syndicated corporate loans

A form of provisional treaty relief was originally introduced into UK tax administration in 1999 but that scheme has now been amended so as to take account of the introduction of the new passport scheme with effect from 1 September 2010.

The earlier form of provisional relief applied (although in different ways) to both syndicated corporate loans and one-to-one corporate loans but the latter element of the original scheme is now considered unnecessary in view of the introduction of the new passport scheme. Therefore, no new applications for provisional treaty relief for interest payments arising from one-to-one loans may be made after 31 August 2010.

The remainder of the original provisional relief scheme is now rebranded as 'the syndicated loan scheme'. Broadly speaking, this enables complex multi-party and/or multi-jurisdictional lending arrangements to be made subject to a single application for treaty relief on behalf of the all eligible foreign lenders participating in the lending arrangements, with that single application for tax relief being channelled through an appropriate body that undertakes to act as syndicate manager for this purpose.

Changes in the membership of a syndicate will not necessarily need to be reported to the tax authorities on an individual basis, provided that the overall UK tax profile of a syndicate is not altered as a result (for example, no specific reporting of syndicate changes would usually be required if one lender that was eligible for a 10% rate of tax under a double tax treaty was replaced by another lender that was also eligible for such a 10% treaty rate).

Foreign lenders are eligible in principle for inclusion in the SLS regime if, from a UK perspective, they have the character of companies. In this respect, one of the key characteristics of a lender is a lack of tax-transparency, so that participation in the SLS regime will not generally be available to lenders that are partnerships nor will participation be open to certain other types of legal body (such as US LLCs) that are regarded by the UK tax authorities as transparent for tax purposes.

However, this does not necessarily mean that a loan involving partnerships or other tax-transparent bodies will be incapable of being covered by the SLS regime. This is because it will still be possible under certain conditions (for example, where no more than 20% of total indebtedness is held by ineligible bodies) for a syndicate manager to seek permission to pay interest without deduction of tax in respect of any lenders that are companies based in suitable treaty-protected foreign jurisdictions. One of the syndicate manager's responsibilities will be to identify different taxable categories of lender, so that the tax authorities are able to authorise payments on a 'block' basis to sub-groups of syndicated lenders who are entitled either to full exemption from UK tax or reduced treaty rates of taxation.

There are various conditions which must be satisfied before a particular loan will be considered eligible, such as the requirements for the loan to be on fully commercial terms and for the lenders to be unrelated to the borrower.

The UK tax authorities must also be satisfied that the proposed syndicate manager (which could potentially be the borrower) is a suitable person to co-ordinate applications for tax relief on behalf of a number of foreign parties. Both the membership of a syndicate and the syndicate manager's administrative practices are liable to periodic scrutiny by the UK tax authorities, in order to ensure that the SLS regime is being implemented properly by the parties involved in relevant syndicated loans.

The tax authorities expect syndicate members to demonstrate a serious long-term commitment to the SLS regime and the SLS facility will not be made available in any particular case if it appears to the authorities that there is a lack of such commitment for the full anticipated life of a syndicated loan

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.