Currently, the obligation to deduct U.K. withholding tax from interest payments is not required if the instrument on which the interest is paid is a quoted Eurobond. The United Kingdom introduced this exemption from the withholding tax requirement in 1984 to facilitate external financing from third party non-U.K. lenders through the issue of Eurobonds.
In recent years, several groups have issued Eurobonds between companies in the same corporate group and listed them on stock exchanges in tax-friendly territories such as the Channel Islands and Cayman Islands, where they are not actually traded. In effect, the conversion of existing inter-company debt into quoted Eurobonds enables a company to make gross payments of interest out of the U.K. to a fellow group company, where otherwise withholding tax would be required.
For more information, contact your KPMG adviser.