Unsurprisingly, listing debt has become a favoured way of eliminating withholding tax (WHT) on the payment of interest. Besides the fact that this method brings a certain treatment, many boards of UK companies have discovered to their surprise that a stock exchange listing can be inexpensive, easy and kind on their time. This contrasts directly with their experience in obtaining clearance under double tax treaties, particularly with the HMRC crackdown on the use of ‘conduit arrangements’, which route debt through countries whose double tax treaties with the UK are favourable. When are they relevant?
Generally speaking, WHT, at a rate of 20%, becomes payable when a UK-resident company pays interest on a loan to a party in an overseas jurisdiction. Two common examples are loans from offshore group companies to UK members of the group and loans to UK portfolio companies by private equity funds with overseas investors.
The ‘quoted Eurobond’ exemption
Debt listings rely on the ‘quoted Eurobond’ exemption (s882 of the Income Taxes Act 2007). To fall within this exemption, the debt must be in the form of a security that:
- is issued by a company;
- is listed on a recognised stock exchange (under s1005(1) of the Income Tax Act 2007); and
- carries a right to interest.
Examples of debt securities are loan notes, promissory notes and bonds.
Which exchange?
All recognised stock exchanges are well regulated. This is a requirement of recognition by HMRC. However, some exchanges are better than others for the purpose of debt listings. This really comes down to ease of use. The Channel Islands Stock Exchange (CISX) has stolen a march in this regard. Many of the more traditionally recognised stock exchanges, for example the LSE, Irish Stock Exchange and Luxembourg Bourse, fall within the EU/EEA. They are therefore subject to the EU directives, including the Prospectus Directive and the Transparency Directive. The CISX lies outside the EU/EEA and is not subject to these directives. This means that its disclosure requirements and continuing obligations are less onerous, and the accounts of issuers do not need to be prepared on an International Financial Reporting Standards basis. Besides this, the debt listing rules of the CISX are simple and flexible, the exchange is responsive and the Channel Islands are conveniently located and familiar territory for UK businesses.
Types of listing
Debt needs to be in the form of a debt security (for example, a loan note) for it to be listed and to receive the benefit of the exemption. However, even a loan that is not a debt security can be listed, provided a debt security ‘wrapper’ is created to represent it.
The types of debt listing range from simple single listings where loan notes issued under an instrument (for example) are listed, to single listings of debt securities with a ‘payment in kind’ (PIK) facility, which allows for the automatic listing of PIK notes on issue, to listings under programmes that allow for multiple issues and listings under multiple instruments with different terms.
When to list?
It is best to list debt at the time it is put into place, or shortly afterwards, as this will help focus the mind on getting the initial form and terms of the debt security right for listing. However, the ‘quoted Eurobond’ exemption applies to interest ‘paid’, as opposed to ‘accrued’, during the period in which the debt security is listed. In other words, unpaid interest that accrues prior to the listing of the debt securities can be paid after the listing without WHT arising.
Process
Debt can be listed on the CISX in as little as two days, although the whole process usually takes three to four weeks for a simple listing. Where the debt is subordinated to the other debt of the issuer or its group, the terms of the subordination need to be reviewed to ensure that there are no obstacles to the listing taking place. The instrument pursuant to which the debt is issued (for example, the loan note instrument) also needs to be reviewed to ensure that it allows for the listing. Typical issues include: requirements for consents or approvals, prohibitions onthe listing of the debt, restrictions on transfer (the debt must be freely transferable for it to be listed – while this is a requirement, there is no requirement to actually transfer the debt) and restrictions on the payment of interest. Consents and approvals can be obtained. The prohibitions or restrictions can be removed by amending the relevant documents.
The next step is to appoint the listing agent. The listing agent is a member of the CISX responsible for ensuring that the issuer is aware of the listing rules. It acts as the intermediary between the exchange and the issuer and is responsible for making the application for the listing on behalf of the issuer. It is appointed for the duration of the listing and, besides receiving a fee in respect of the listing, is paid a small annual retainer.
Information on the issuer is then collected for inclusion in the listing particulars. A significant amount of this information can be obtained from Companies House in the UK and then verified by the issuer. Information required directly from the issuer includes whether there has been a material deterioration in its financial affairs since its last set of accounts (or since incorporation if it has no accounts) and whether it is involved in or aware of any likely material litigation. This information can usually be easily provided by the issuer.
The first drafts of the documents are then prepared. As can be expected, much of this is of a standard sort and does not require much of the issuer’s attention. Key documents are the listing particulars (a relatively short document) and the minutes of the meeting of the issuer at which the information in the particulars is verified and the listing approved.
Once the draft documents are in good shape, an initial application is made to the CISX. There is no obligation to list following this application. Its purpose is to allow the exchange the opportunity to see the key documents, to provide their comments and to request any further information in respect of the proposed listing.
After the comments of the CISX are received, the documents are finalised, the board meeting of the issuer (and, sometimes, the noteholders) takes place, the relevant documents are executed and the final application for the listing is made. Provided the application is made by early afternoon, the grant of listing is received in the late afternoon.
The issuer has continuing obligations in relation to the listed debt. However, these obligations are not particularly onerous. In short, the issuer is required to provide the CISX with its accounts within a reasonable time of them being filed and inform the CISX of any changes to the terms of the debt, any redemptions of the debt and any changes to the issuer’s financial position that may materially prejudice its ability to honour its obligations in respect of the debt. It should be noted that there are no ongoing annual CISX fees.
Conclusion
The popularity of debt listing as a means of dealing with WHT has grown out of the certainty that the method provides, coupled with its ease and cost-effectiveness, the speed of implementation and the limited continuing obligations following the listing. Put like that, the result comes as no surprise.
By David White, director (corporate), and Kerry Broadhead, senior solicitor (corporate), McGrigors LLP.
E-mail: david.white@mcgrigors.com; kerry.broadhead@mcgrigors.com.
