If you borrow money from an overseas lender which is registered with the DTTP scheme then you may not need to withhold any income tax or you may be able pay a reduced rate of withholding under the terms of the relevant double tax treaty.
The overseas lenders who are registered under the scheme are included in the relevant register of which the latest update was published on 4 January 2018.
Non-resident lenders making loans into the UK are normally subject to income tax (currently 20%) on interest paid by UK borrowers.
Under the DTTP scheme, a single application is made by the lender to seek ‘Treaty Passport status’. The UK borrower may then be eligible to deduct no, or a lesser amount of, withholding tax (WHT) under the terms of the relevant tax treaty.
The DTTP scheme was introduced from September 2010 and initially only allowed corporate entities to pay interest without deduction of tax or at a lower rate as specified in the relevant tax treaty.
After a consultation in 2016 the scheme was extended to all borrowers. In addition lenders can be non-corporate entities, such as individuals and charities, and transparent entities such as partnerships, as well as sovereign wealth funds and pension funds.
In the case of transparent entities, all members beneficially entitled to the interest must be resident in the same jurisdiction and be entitled to the same benefits under the relevant treaty. This means that in practice only funds/partnerships with relatively static memberships will be apply to apply for the treaty passport.
The scheme works as follows:
“The overseas corporate lender applies for a treaty passport under the scheme and, once granted, this passport can be used to make multiple loans to UK borrowers. Thus the lender does not need to apply to its own tax authority and HMRC in connection with every loan. The prospective borrowers in the UK consult an online database of passported lenders to check that a valid passport exists and, prior to making the first interest payment, the UK borrower notifies HMRC of the lending/borrowing relationship by submitting Form DTTP2. HMRC then issues a Direction to the UK borrower to pay the interest without withholding tax (WHT) or at a lower rate of WHT, as specified in the relevant tax treaty.”