Good News For Listings On The Channel Islands Stock Exchange (The "CISX").

Despite recent concerns, the Channel Islands Stock Exchange remains a simple and tax efficient way for private equity investors to finance the costs of shareholder debt.

The Finance (No.2) Act 2005 (the "Finance Act"), limited the ability of UK private equity companies to reduce the tax burden of financing shareholder debt arising out of their investments.

Since the Finance Act came into force, UK private equity companies have been unable to obtain tax relief for finance costs on shareholder debt unless they are able to show (under the transfer pricing rules) that those finance costs could have been incurred through third party borrowing. Moreover, any deductions that they are deemed to be entitled to will normally only arise on a paid basis (rather than an accrued basis), unless the costs to which they relate are paid within a year of the accounting period in which the costs were accrued.

These changes can be disadvantageous towards private equity investee companies, particularly in cases where financing costs have been incurred that cannot quickly be repaid. This is often the case, either because sufficient funds are simply not available or, in some cases, because the arrangements that the private equity company entered into in order to finance the acquisition, prevent it from applying the funds to service its interest payments.

A practical solution to this problem has been found in some instances, by the private equity company issuing payment in kind notes ("PIK Notes") in lieu of making interest payments in cash. In this way the company is able to satisfy its interest payments as they fall due, without having to use cash and it is also able to take advantage of any tax deductions that may arise on an accruals basis.

Furthermore, whilst any such payments of interest (including payment in kind) by a UK private equity company would normally give rise to a withholding tax (WHT) liability, they can take advantage of a statutory exemption from UK WHT - the Quoted Eurobond Exemption (the "QEE").

This QEE applies where a debt issuer lists securities on a recognised stock exchange (within the meaning of Section 841 of the Income and Corporation Taxes Act) and allows the issuer to make payments of the listed securities gross without deduction for tax.

Recently, fears have been voiced in some quarters that PIK Note listings on the CISX may no longer benefit from the QEE. This uncertainty has arisen from drafting in the Finance Bill 2007 (the "Finance Bill") where it is proposed that the definition of "listed" for tax purposes should refer to securities which are not just listed but also "admitted to trading".

The wording of the proposed legislation refers to securities being not only listed, but also "admitted to trading" and the concern amongst some commentators has been that whilst it is easy to determine whether a security is deemed to be "listed" (by reference to relevant published lists), it may be less easy to be certain that a security has been "admitted to trading"- particularly in the context of a PIK Note listing on the CISX, which is a technical listing.

Fortunately, the CISX should now be able to dispel these anxieties having received comfort from HMRC that, notwithstanding the proposed amendments contained in the Finance Bill, bond instruments traded on the CISX are still deemed to be listed and admitted to trading, and as such still fall within the QEE.

HMRC has explained to the CISX that the intention behind the proposals contained in the Finance Bill is not to alter the established status of specialist debt listings on the CISX but rather to ensure that in jurisdictions where stock exchanges have different market platforms, an acceptable regulatory regime is in place which HMRC is satisfied means that any securities listed on such an exchange should be deemed to be listed.

Listing PIK Notes on the Exchange therefore, remains a simple and efficient mechanism for UK private equity companies to make tax deductible payments of interest as they accrue, without incurring WHT liabilities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mr Francis Katamba

Appleby

Canon's Court

22 Victoria Street

PO Box HM 1179

Hamilton

HM EX

BERMUDA

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URL: www.applebyglobal.com

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