Withholding tax is not an issue for loans of less than a year
Interest payments from UK companies to lenders in tax haven countries will usually suffer 20% withholding tax. This is often a real commercial cost because the interest income would not otherwise be taxable on the recipient and there is generally no mechanism to recover the withholding tax.
I have talked about discounted bonds in previous tax bites. This involves structuring the interest as a discount in a bond as no withholding tax needs to be paid on the discount.
E.g. Instead of having a 3 year loan for £200,000 with 10% interest the borrower could issue a £266,200 bond for £200,000 which is redeemable after 3 years. In contrast to the loan, if the bond is structured properly, there should be no withholding tax on the payment of the £66,200 ‘discount’.
Many people seem to forget that withholding tax is not payable on short interest (interest on loans of less than 12 months). Depending on commercial circumstances, it is often possible to structure interest as ‘short interest’ – although HMRC are likely to attack arrangements where successive loans of less than a year are agreed between the same parties. In these scenarios some kind of discounted bond arrangement is likely to be a more sensible option.
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