845C Treatment of Additional Tier 1 instruments

Summary

This section provides for the tax treatment of:

1. Additional Tier 1 instruments issued by financial institutions to meet the regulatory capital requirements imposed by the Capital Requirements Directive IV and the Capital Requirements Regulations, which implement Basel III in the EU; and
2. instruments with equivalent characteristics to Additional Tier 1 instruments but that are issued by non-financial institutions.

For the purposes of this section, references to “Additional Tier 1 instruments” will include instruments described at (b) above.

Additional Tier 1 instruments share features of both debt and equity which makes the tax treatment of such instruments uncertain. This section provides that Additional Tier 1 instruments are to be treated as debt instruments. Coupon payments in respect of the instruments are to be regarded as interest thereby enabling tax deductibility in respect of the coupon payments. The section also provides for an exemption from the obligation to deduct withholding tax in respect of coupon payments made under the instruments by deeming the instruments to be quoted Eurobonds for the purpose of section 64.

Details

(1) “Additional Tier 1 instrument” is defined:

1. by reference to the meaning given to it in the Capital Requirements Regulation; and
2. also includes other instruments, notwithstanding that they have not been issued by institutions as specified under Article 4 of the Capital Requirements Regulation. This is subject to the requirement that where a condition prescribed in respect of Additional Tier 1 instruments in accordance with Article 52 of the Capital Requirements Regulation derives from the fact that Additional Tier 1 instruments are issued by financial institutions, the corresponding criterion in respect of an instrument issued by a non-financial institution will need to be modified accordingly to ensure that it is equivalent.

“Capital Requirements Regulation” means Regulation (EU) No. 575/2013 of the European Parliament and of Council of 26 June 20131 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No. 648/20122 .

“coupon” means a distribution within the meaning of Article 4 of the Capital Requirements Regulation.

(2) This subsection provides that an Additional Tier 1 instrument is to be treated as a debt instrument for tax purposes.

(3) Coupons payments in respect of Additional Tier 1 instruments are not distributions or charges on income for tax purposes but are to be treated as interest.

(4) Section 64 is deemed to apply to Additional Tier 1 instruments as it applies to a quoted Eurobond, thereby enabling coupon payments in respect of Additional Tier 1 instruments to be paid without deduction of tax where the provisions of section 64 are satisfied.

(5) The provisions of this section shall not apply to an Additional Tier 1 instrument which forms part of any arrangement or scheme of which the main purpose, or one of the main purposes, is to avoid liability to tax.

Relevant Date: Finance Act 2021