Japan and Canada
Many of the UK double tax treaties provide for a zero rate of withholding tax on interest paid by a UK company but there are still a few treaties which only provide for a non-zero reduced rate of relief.
The two main examples are Japan and Canada which to date have given rise to difficulties with financing from those countries but there have been recent changes in both treaties.
From 1 January 2015 the situations where interest can be paid at a zero rate of withholding under the UK Japanese Double Tax treaty by a UK company to a Japanese lender have been extended. A Protocol to the treaty was agreed in 2013 and will enter into force on December 12, 2014.
Under the existing treaty the rate of withholding was generally 10%. This rate was reduced a number of years ago to 0% for loans from Japanese financial institutions. Under the revised treaty the rate of withholding will now be 0% unless the interest is related to the results of the lender in which case the rate is 10%.
The UK and Canada also agreed a protocol to amend their treaty on July 21, 2014 (still to enter into force). The amended treaty includes provisions eliminating withholding tax on cross-border interest. However in this case the exemption will only apply if the interest is paid to a person with whom the payer deals at arm’s length.
The exchange of notes makes it clear that connected persons are deemed for the purposes of the treaty as not acting at arm’s length such that the existing rate of withholding of 10% will continue to apply to group loans.
The changes to these treaties are welcome and should provide companies headquarted in those countries more scope to organise their borrowings.