WITHOLDING TAX: UK SOURSE OF INTEREST

A buyer of a real estate asset held in a Jersey company seeks insurance against the risk of UK withholding tax being imposed on interest payments under third party debt financing.

The loan is secured against UK property, creating a risk that the interest could be found to have a UK source for UK tax purposes such that it should be subject to UK withholding tax. Given this fact and other relevant factors, the buyer is not prepared to assume this risk. The seller is an entity which will be liquidated after completion of the sale of the real estate. We work with the buyer’s accountants and lawyers to insure a specific indemnity provided by the seller for this risk to the buyer in the Tax Deed. This then provides the buyer with the recourse it requires as the seller will not be in existence to pay any claim under the specific indemnity. The seller agrees to pay for the insurance for the buyer instead of having to hold back funds for this risk which would then delay the liquidation.

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