The TMI Tax Doctor: Debt Restructuring
Welcome to the TMI Tax Doctor, which is designed to look at some of the tax issues associated with treasury globally. In this first column I answer a UK tax-related question around debt restructurings. I also address a second question relating to the key tax issues to consider when assessing potential jurisdictions for a group treasury and finance company.
Q1: I am discussing a debt for equity swap with my lenders; what are the key UK tax considerations on the treatment of any accounting gain recognised on a debt release as a consequence of the swap?
Simple waivers or releases of debts by lenders prima facie result in an immediate UK tax charge for the borrower.
However credits arising in respect of debt releases in borrowing companies that have issued equity to lenders are generally exempt from being taxed, but this does not apply to all types of shares.
Recently updated HMRC guidance on the taxation of debt for equity swaps has also confirmed this tax treatment should remain (i.e., credits on such debt releases in the borrower are not taxable) even where lenders sell on the equity stakes shortly after issue, but notes that where shares issued to the lender are immediately sold to a party that is connected to the borrower, then the consideration for the debt may be the cash received on the on-sale and the exempting provisions may therefore not apply.
What is clear from HMRC’s guidance is that, as you’d expect, the tax analysis will turn on the facts and a realistic appraisal of the transactions is needed in order to determine the potential tax issues.
The UK tax issues highlighted above can be involved and are not limited to the debt itself, as the associated hedging instruments can carry significant tax consequences and/or attributes which also need to be managed. The restructurings that may be required to benefit from the relevant exempting provisions can be complex and therefore the earlier companies start thinking through their refinancing needs and options, the better they can navigate through to obtain an optimal solution.
Q2: As a result of our group’s continued expansion in Asia, we are considering consolidating various treasury and finance activities in that region into a single finance company. We currently have significant functions in both Hong Kong and Singapore: what are the key tax issues to consider when comparing the two jurisdictions?
In terms of comparing the various taxation regimes in each jurisdiction in the context of a local treasury and finance company, some of the key tax issues to consider would be (i) local tax rate on finance income; (ii) extent of tax treaty network; (iii) treaty withholding tax rates on interest and dividends; (iv) transfer pricing provisions and (v) stability of tax regime.
The local corporate tax rate on income in Singapore is currently 17% compared with a rate in Hong Kong for locally sourced income of 16.5%. In Singapore, a rate of 10% may also be accessed under the Finance and Treasury Centre tax incentive and un-remitted foreign source income is tax exempt. Hong Kong applies a rate of 0% to offshore income.
Both Singapore and Hong Kong have stable tax regimes, advanced ruling systems and guidelines on the application of arm’s length principles to transactions between related parties. However Singapore has a more extensive treaty network (c.68 treaties vs c.18 for Hong Kong).