New exemption from UK withholding tax for private placements will be available for use from 1 January

The exemption was introduced in the first Finance Act of 2015 that received Royal Assent on 26 March 2015 but was not to take effect until a future date to be specified in regulations.

Broadly, a company has a duty to withhold UK tax, currently at a rate of 20%, on payment of UK interest, subject to limited exceptions.

Tax expert Eloise Walker of Pinsent Masons, the law firm behind Out-Law.com, said: "To date withholding tax has been a significant expense to businesses seeking to raise finance that are unable to secure debt finance from a bank. It is hoped that this new exemption will create opportunities for struggling businesses to secure financing without incurring substantial withholding tax costs."

The new exemption is being introduced to encourage the use of private placements as an alternative form of finance.   The UK's private placement market is seen as being underdeveloped.  In March 2012 the Breedon Report recommended increasing the number of UK-based private placements investors in order to unlock a new source of financing for mid-sized borrowers. 

A private placement is a type of unlisted debt instrument that is sold by way of a private offering to a small number of investors.  Typically, a private placement will be a long term investment of five to 12 years. Investors in private placements usually include institutional investors such as insurance companies and pension funds. 

The new exemption will only apply to certain unlisted private placements.  The regulations specify that the term of the security, which constitutes the private placement must not be more than 50 years and that the aggregate value of securities contained in the private placement must be at least £10 million.

The exemption will only be available if the debtor holds a certificate from the creditor, confirming that the creditor is resident in an approved territory and is beneficially entitled to the interest in the private placement for genuine commercial reasons and that the private placement is not being held as part of a tax avoidance scheme. 

There is also a requirement that the debtor has entered into the private placement for genuine commercial reasons and that the debtor reasonably believes that it is not connected to the creditor(s). 

The regulations contain significantly fewer conditions than originally anticipated.  When the exemption was first announced in the 2014 Autumn Statement, the government had announced that a number of conditions would be introduced relating to: the issuer; the holder and the security itself. 

For example in a technical note published in December 2014 HM Revenue & Customs envisaged that there would be a requirement for the issuer to be a trading company; for the holder of the private placement to be a UK-regulated financial institution, or an equivalent entity authorised outside the UK carrying-on substantially similar business; and for the security to have no right to be converted into shares of the issuing company.  These conditions appear to have been discarded.

"It is good to see that industry lobbying seems to have had a beneficial effect here in slimming down what were potentially quite stringent conditions," said Walker. "On the downside, it has taken a very long time to get to this point, and many deals in 2015 have had to restructure – or wait for the commencement date – before they could execute."