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Using Quoted Eurobonds to address UK Witholding Tax

Group Reorganisations

10 September 2013

Using Quoted Eurobonds to Address UK Withholding Tax

In general, UK withholding tax becomes payable at the rate of 20% when a UK tax resident company pays interest on a loan to an overseas lender. Ordinarily, the UK borrower will not be disadvantaged because it can still benefit from a potential tax deduction for the whole of the interest. However, the lender will suffer a disadvantage: either a cashflow disadvantage because of time taken to recover the tax withheld, or an absolute cost if it is unable to recover the tax at all.

This withholding tax does not apply in certain cases, such as where the interest is payable to an EU member state or another country which has a tax treaty with the UK. However, in many cases no treaty applies, such as where the lender is in a tax haven. Even where a tax treaty does apply, various administrative requirements must be complied with, which takes time and money. Listing the loan as a Quoted Eurobond is often a simpler and easier way of addressing the same underlying withholding tax issue.

The Quoted Eurobond Exemption applies to debt listed on a "recognised stock exchange". Where this exemption applies, no withholding tax is payable on interest payments in respect of such listed debt.

The practicalities of benefiting from the Quoted Eurobond Exemption

In order to benefit from the Quoted Eurobond Exemption, the debt must be listed as a Eurobond at the point when interest is paid. To be exact, the debt must be in the form of a security (generally loan notes, but not necessarily) which:

• is issued by a company;

• carries a right to interest; and

• is listed on a recognised stock exchange.

This type of listing is sometimes referred to as a 'technical listing', because the debt is held by related parties and there is no intention for the security to be offered to the public or actively traded on the stock exchange.

The choice of exchange is usually dictated by considerations such as cost, responsiveness, disclosure obligations and ongoing obligations. The International Stock Exchange (TISE, formerly known as the Channel Islands Securities Exchange) or the Cayman Islands Stock Exchange (CSX) are often preferred for those reasons.

The following is an overview of how a company can create and list Eurobonds on TISE in order to benefit from the Quoted Eurobond Exemption in relation to new or existing intercompany debt.

1. Confirming the suitability of the borrower

As part of the process of using the Quoted Eurobond Exemption, the borrower will become the issuer of securities (usually loan notes), and it must comply with the rules of the relevant Exchange. The Exchange must be comfortable with the status of the issuing company.

Before any detailed work on the listing is carried out, it is important to consider whether the borrower is likely to be acceptable to the Exchange. Factors that may raise concerns include:

• The borrower’s last accounts being qualified

• The borrower having ongoing operating losses

• The borrower having only one director

Possible objections may also arise based on the nature of the borrower’s activities, the identity of directors or the countries in which the borrower operates.

Your legal adviser should discuss any concerns with you and raise them with the listing agent to be appointed for the listing, so that they can be addressed before any further work is done.

2. Information gathering

Once it has been confirmed that the borrower is suitable as an issuer of quoted securities, the terms of the relevant debt must be established. This should cover the key commercial points such as amount, interest rate, repayment provisions and the nature of any security provided by the borrower.

For new debt, this will be straightforward. For existing debt, it will be a matter of confirming what documentation or other evidence exists as regards the terms of the debt. In many cases, intercompany debt is in non-security form, such as a loan agreement. Or there may be no written agreement at all, and the debt is reflected only in intercompany ledgers.

The proposed issuer (i.e. the borrower) should also check whether the proposed listing may be impacted by any third party arrangements, such as group loan facility agreements. This will focus on issues such as:

• whether the debt is or will be subordinated;

• whether there are any restrictions on the transfer of the debt by the holder (i.e. the lender); and

• whether there are any restrictions on the listing of securities by the group.

3. Creating a listable security

For new debt, the lender will subscribe for new loan notes to be created by the borrower.

For existing debt, the loan already in place will need to be converted into the form of a listable security. This is typically done by means of a bond listing agreement. Essentially, this is an agreement between the borrower and the lender which states that a security will be issued in a specified form (usually notes issued under a loan note instrument), which will replace the existing documentation and represent the debt obligation going forwards.

Considerations which affect the form of the listing and the loan note instrument include the following:

• whether a single class of loan notes will be sufficient, or whether multiple classes of notes are required (for example, in different currencies or with different maturity dates and interest rates);

• whether additional headroom for future issues will be created;

• whether a facility is to be created to allow interest to be satisfied by PIK notes (Payment in Kind notes).

In order to be listable, the security must be freely transferable. This does not mean that the relevant loan notes are actually traded.

4. The listing process

This involves preparing “listing particulars” which describe the issuer and the terms of the relevant loan notes. This is a relatively short document, especially if the issuer is a special purpose vehicle or holding company. It is not a selling document, and it generally does not contain information on the trading prospects of the group.

Drafts of the listing particulars and loan note instrument are submitted to TISE for comment as part of the initial application. Comments from the Exchange are usually received within a matter of days.

The listing particulars must include a statement to the effect that the issuer accepts responsibility for the information contained in the listing particulars, and that to the best of the issuer's knowledge and belief, the information given is in accordance with the facts and does not omit anything likely to affect the significance of that information.

Following any comments from the Exchange, the listing documents are finalised. The factual accuracy of the contents of the listing documents is confirmed by means of board minutes of the issuer. Because the security will not be offered to the public, the drawn-out process of verification associated with public offerings is not required.

A number of other documents will accompany the final application to the Exchange. These include a letter from the issuer containing undertakings to comply with the rules of the Exchange, and a letter from the listing agent setting out any information which has been omitted from the listing particulars which would ordinarily be required under the listing rules.

A listing fee is payable to the Exchange. Provided that the final application is in order and is received by the Exchange by the early afternoon, the listing is usually confirmed later that day.

5. Ongoing obligations

For a period of at least fourteen days following the listing, certain documents relating to the listing must be available for inspection. Those documents usually include the listing particulars, the loan note instrument and the issuer's current articles of association.

Additional ongoing obligations of an issuer in relation to a TISE listing are not onerous. They include the following:

• providing the Exchange with copies of any annual accounts or interim financial statements as soon as practicable following their publication (or referring the Exchange to publicly available information placed on the internet or central depository)

• informing the Exchange of any changes to the terms of the security

• informing the Exchange of any changes to the issuer's financial position which may materially prejudice its ability to honour its obligations in respect of the debt

• if other securities of the issuer are listed on another exchange, ensuring that TISE receives equivalent information at the same time as it is made available to the other exchange

An ongoing fee is payable to TISE, and the issuer must maintain a listing agent. This usually involves a small annual retainer.


The process described above can be completed in a matter of weeks. It therefore remains an effective tool for addressing UK withholding tax issues.

Related resources

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.

To get your free copy, click here.

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Article by
Paul Sutton
LCN Legal Co-Founder

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