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UK Tax: HMRC Double Taxation Treaty Passport Scheme

HM Revenue & Customs (HMRC) is launching a Double Taxation Treaty Passport (DTTP) Scheme for overseas corporate lenders.

Here is a basic outline of how the Scheme will operate:

- An overseas corporate lender in a country with which the UK has a Double Taxation treaty that includes an interest or income from debt-claims Article may apply for a 'Treaty Passport' from HMRC.

- If a Treaty Passport is granted by HMRC, the passport holder will be entered into a publicly available register with a unique 'DTTP' number. The register will be made available online on the HMRC website.

- The online register can be consulted by a prospective UK resident corporate borrower to verify the lender's Treaty Passport holder status.

- If the UK borrower enters into a loan agreement with a lender who is registered as a Treaty Passport holder the lender will notify them of their passport holder status and reference number.

- The UK borrower will notify HMRC within 30 days of the 'Passported' loan. Form DTTP2 for this purpose will be available from the start of the Scheme on 1 September 2010.

- HMRC will use the DTTP2 notification details to issue a Direction to the borrower to pay the interest with income tax deducted at the rate set out in the relevant Double Taxation treaty.

- For non-Treaty Passport situations, the normal 'certified DT claim' remains the default method for applying for Double Taxation treaty relief.

- The Double Taxation Treaty Passport Scheme is for overseas corporate lenders only. Individuals are not eligible.

HMRC Double Taxation Treaty Passport Scheme
Operational overview

1. An overseas company or like opaque entity will apply for a Double Taxation Treaty Passport to HMRC using an application form DTTP1.

2. If successful, it will be granted Double Taxation Treaty Passport Holder status and allocated a unique Double Taxation Treaty Passport reference to be used for all matters to do with the Passport scheme.

3. Its status will be evidenced by
     -  a formal letter of acceptance into the DTTP scheme and
     -  its inclusion in a publicly available online database of passport holders for the use of prospective borrowers.

4. A UK corporate borrower (or a foreign corporate borrower making UK source interest payments) may then apply the "treaty rate" of withholding tax from the start of the loan, relying on the lender's passport holder status.

5. The borrower will be required to send to HMRC LBS DT Treaty Team, Barkley House, Castle Meadow Road, Nottingham, NG2 1BA a notification on Form DTTP2 of the making of any "passport loan" 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. Depending on IT and funding, the notification will be by way of an online interactive form allowing for the quickest and easiest way of delivery.

6. On receipt, the information in the notification will be used by HMRC as soon as possible to issue a Direction under SI 1970/488 to the UK payer. The notification will need to be full and accurate in order not to call into question the efficacy of the Direction.

7. Details of the loan, lender and so on will also be extracted from the notification and entered into HMRC's Treaty Clearance database, where they will be available for Business International, LBS caseworkers and other HMRC stakeholders to view, extract and use.

8. In summary, as is spelled out in further detail at parts 10 and 11 of the Double Taxation Treaty Passport Terms and Conditions, both the passport holder and the borrower will have notification obligations under the scheme:
     - the passport holder must tell the lender of the need to send a Form DTTP2 notification to HMRC within 30 days of the making of a passported loan and
     - the borrower in turn must send that notification within the specified time, or the Double Taxation Treaty Passport scheme will not apply to the loan, and full withholding tax obligations will be applicable for any interest payments made under it.

9. Although loan documentation will not be required in connection with a passport loan notification, HMRC (as outlined in the DTTP Terms and Conditions) may request a lender - or a borrower on the lender's behalf - to supply them for any loan after a notification has been received. This may be because of a particular compliance "prompt" such as the size of a loan, or at the request of other HMRC stakeholders.

10. In asking for this documentation, or raising any other questions about a particular loan, HMRC is not constrained by the CTSA rules when dealing with the overseas company in relief at source cases.

11. Loan documentation may then be passed on to Business International and the borrower's tax office (as appropriate), and any other HMRC stakeholders, in connection with any review of the loan and company that is then felt necessary.

12. Parts 13 and 14 of the Double Taxation Treaty Passport Terms and Conditions deals with the general obligation incumbent on a passport holder to use its passport with the utmost good faith, and with a genuine and full self-assessment that all conditions for relief are truly present with any loan chosen to be "passported". (This is in addition to the normal duty of care to keep HMRC informed of any changes in material circumstances relating to a passport holder or its circumstances.)

13. It is on the basis that a passport holder will use its passport conscientiously and in good faith that HMRC can countenance the use of a DTTP passport even where both lender and borrower are connected parties.

14. A passport holder found to be in breach of the DTTP Terms and Conditions will be found liable to the compliance consequences detailed in Part 15 of those Terms, namely (and in likely order of successive application, suited to the gravity of any breach):
     - a formal warning
     - suspension of passport holder status for a fixed period (3 months, 6 months, etc.)
     - removal of passport holder status.

15. The latter two "consequences" would require altering any online public database of passport holders promptly and accurately: HMRC would (notwithstanding any disclaimers built into the system) be perceived as having a duty of care to both lenders and borrowers.

16. HMRC reserves to itself the right to decline an application for treaty passport holder status. It further reserves the right not to apply the DT Treaty Passport facility to a particular loan, or to a particular borrower.

17. HMRC may also have to consider periodically reviewing a sample of passport holders in order to:
     - confirm that passport holders are correctly understanding and applying their responsibilities
     - uncover any deficiencies or matters deserving of improvement in the scheme
     - encourage and obtain customer involvement and feedback on the scheme and its operation.

18. The certified claim method of obtaining DT treaty relief will remain for loans contracted outside the Double Taxation Treaty Passport scheme, including instances where the borrower (and lender) might chose not to use the new process. And of course any borrower or lender excluded from use of the Double Taxation Treaty Passport scheme will need to fall back on the certified claim process.

19. The PAR system of dealing with syndicated loans, and the Syndicated Loans element of the Provisional Treaty Relief Scheme (PTRS), soon to be re-launched as the Syndicated Loan Scheme (or SLS), will also be unaffected. If anything, the involvement of a passport holder lender in either a PAR loan or an SLS syndicated loan should ease the granting of DT treaty relief in both respects.

20. In applying for a passport, the overseas company will be required to declare that it has read, understands and will abide by all the Terms and Conditions of the Double Taxation Treaty Passport Scheme to be published on the HMRC website.

21. The applicant must also declare that it will not make use of its DT Treaty Passport in making loans where any material circumstances surrounding a loan - including the sourcing of the funds - could call into question the ability of the passport holder to be considered as the beneficial owner of the interest within the meaning of the guidance contained in the HMRC International Manual at INTM332030 and after.

22. The applicant will also be required to declare that when making any passported loan it undertakes that all necessary conditions for the relief claimed are met, such as, for example, the 'subject to tax' status of the interest to be received under the loan.

23. The Terms and Conditions of the scheme will stipulate that a passport holder will promptly comply with a request from HMRC for information and/or documentation relevant to any passported loan that the holder contracts.

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