Top 5 Eurobond Myths
The so-called “Quoted Eurobond Exemption” remains an effective way of dealing with UK withholding tax on interest. It is potentially available where the borrower is a UK tax resident company, and the lender is foreign resident.
In many ways, the term “Eurobond” is misleading, and it can give rise to a number of misconceptions. This article clears up five of the most commonly held misconceptions in the context of Eurobond listings to address loan interest between related parties.
Misconception number 1: Eurobonds must be listed on an exchange in Europe
Reality: The Eurobond must be listed on a “recognised stock exchange”. Commonly an exchange outside the EU, such as the Channel Islands Stock Exchange (CISX) or the Cayman Stock Exchange (CSX) is used, because it reduces the amount of information required to be included in the listing particulars.
Misconception number 2: Eurobonds must be denominated in Euros
Reality: A Eurobond can be denominated in any currency.
Misconception number 3: Eurobonds must be actively traded
Reality: In order to qualify for the exemption from withholding tax, the security carrying the right to interest (usually loan notes) must be listed on a recognised stock exchange. It is not necessary for the loan notes to be actually traded, and often they are not.
Misconception number 4: Issuers of Eurobonds must adopt IAS/IFRS
Reality: Provided the Eurobonds are not listed on a regulated market within the EU, there is no need to adopt IAS/IFRS as long as an appropriate accounting standard is used. The Channel Islands Stock Exchange (CISX) and the Cayman Stock Exchange (CSX) do not operate within the EU, but are still “recognised stock exchanges” for the purposes of the Quoted Eurobond Exemption.
Misconception number 5: Listing Eurobonds is a protracted and expensive exercise
Reality: The listing procedure is relatively straightforward. Provided there are no issues with the borrower (and in particular, its accounts are unqualified and do not show ongoing operating losses), it should be possible to create and list the loan notes comfortably within a month. The listing particulars generally focus on the corporate status of the borrower and the terms of the loan notes. They do not need to contain forward-looking statements about trading prospects which can be time-consuming to verify. This all means that the overall cost of the listing is generally modest compared to the benefit achieved.
LCN Legal has published a preliminary information request for corporates which are planning to issue Eurobonds to one or more related parties, in order to address UK withholding tax issues. It is designed to help those corporates and their advisers capture relevant information at the outset of the project. It is not suitable for Eurobond listings which will involve a public offer of securities.
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