Contributed By Winston & Strawn London LLP
Payments of interest with a UK source to a recipient outside the charge-to-UK corporation tax are generally subject to a UK withholding tax (current rate 20%). Application for an exemption from this requirement may be made in certain circumstances, including interest paid to non-UK residents where authority is obtained from HMRC for the interest to be paid gross (or at a reduced rate) under the terms of a double-tax treaty, or is paid under certain listed securities. HMRC operates a fast-track double-taxation treaty passport scheme for overseas corporate lenders which has recently been extended to certain transparent entities, sovereign wealth funds and pension funds (subject to various conditions).
Principal, discounts and premiums are not generally subject to UK deduction of tax.
Lenders with a permanent establishment in the UK are liable for corporation tax (current rate is 19%, proposed to be reduced to 17% from April 2020) on the income profits of that establishment and gains from the disposal of assets situated in the UK that are used in the trade of the establishment.
The sale or transfer of certain types of registered loan capital are charged to UK stamp duty at the rate of 0.5% of the amount or value of the consideration for the transfer although this does not typically apply to the transfer of syndicated loans depending on their terms.
Other than the costs set out in 5.1 Assets and Forms of Security, below, there are no UK taxes, duties or charges relevant to lenders taking security or guarantees from English companies.
A default interest clause may be unenforceable if it is held to be a penalty. A penalty clause is one that obliges the debtor to pay an excessive amount of interest, out of all proportion to any legitimate interest the lender may have in performance. The rule against penalties only applies to default interest; it does not affect interest payable on loans when the paying party is not in breach. Whether a particular provision is penal will depend on the facts of the case, including the interest rate, the market rates at the time of the agreement, whether the agreement is between two commercial parties, the risk involved and the reason for the default rate.
In addition, while there is no mandatory limit on interest rates, extortionate credit transactions can be set aside during insolvency or administration proceedings. However, the powers to do so are seldom used.
Under the terms of the relevant double-tax treaties with the UK, relief from UK withholding tax on interest payments may be denied to the extent that such interest exceeds an arm's length rate.