On 2 October 2012, the Government published a Summary of Responses to its 27 March 2012 consultation on the possible changes to the income tax rules on the taxation of interest and interest-like returns and rules on the deduction of income tax at source which was discussed in our e-alert on 28 March 2012. 

We are pleased to report that the Government has shown that it is willing to listen to respondents and in light of a significant number of responses, the Government will no longer proceed with changes which would have adversely impacted on private equity financing arrangements.

Of particular relevance to the private equity industry, we note that the Government will:

  • not restrict the use of the quoted Eurobond exemption from UK withholding taxes.  In particular, the Government will not take forward its proposal to prevent the quoted Eurobond exemption from applying where the Eurobond is issued to a fellow group company and where it is listed on a stock exchange on which there is no substantial or regular trading in the Eurobond;
  • not extend the scope of UK withholding taxes to both loans with "short" interest and those with "yearly" interest.  The Government has listened to respondents' concerns over removal of the distinction between "yearly" and "short" interest and will not proceed with the abolition of the concept of "yearly" interest.  However, the Government will make changes to its guidance in the Savings and Investment Manual to clarify its view of "short" loans that are repeatedly rolled over; and
  • not introduce a requirement to pay over tax deducted from funding bonds in cash.  Therefore, if there is a UK withholding tax obligation arising on the satisfaction of interest by a payment in kind ("PIK") note or other funding bond, the payer can continue to provide PIK notes to HMRC in satisfaction of the withholding tax.  However, the Government intends to introduce in the Finance Bill 2013 a requirement that the person paying the funding bond issues a certificate stating the value of the bond, whether or not the recipient requests such a certificate.

The Government has noted that a number of responses called for a review of the circumstances in which tax is withheld from interest in a cross-border context.  The  Government has indicated that it will consider this further, although has not provided any further details in this regard.

Click to view the Possible Change to Income Tax Rules on Interest - Summary of Responses document

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