RBS 2005 Annual Report Download - page 269

section
05
Shareholder
information
267
Shareholder information
Annual Report and Accounts 2005
PROs
United States
Payments of interest on a PRO (including any UK withholding
tax, as to which see below) will constitute foreign source
dividend income for US federal income tax purposes to the
extent paid out of the current or accumulated earnings and
profits of the company, as determined for US federal income
tax purposes. Payments will not be eligible for the dividends-
received deduction allowed to corporate US Holders. A US
Holder who is entitled under the Treaty to a refund of UK tax,
if any, withheld on a payment will not be entitled to claim a
foreign tax credit with respect to such tax.
Subject to applicable limitations that may vary depending upon
a holder’s individual circumstances, dividends paid to certain
non-corporate US Holders in taxable years beginning before 1
January 2009 will be taxable at a maximum tax rate of 15%.
Non-corporate US Holders should consult their own tax
advisers to determine whether they are subject to any special
rules that limit their ability to be taxed at this favourable rate.
A US Holder will, upon the sale, exchange or redemption of a
PRO, generally recognise capital gain or loss for US federal
income tax purposes (assuming that in the case of a
redemption, such US Holder does not own, and is not deemed
to own, any ordinary shares of the company) in an amount
equal to the difference between the amount realised (excluding
any amount in respect of mandatory interest and any Missed
Payments which are to be satisfied on a Missed Payment
Satisfaction Date, which would be treated as ordinary income)
and the US Holder’s tax basis in the PRO.
A US Holder who is liable for both UK and US tax on gain
recognised on the disposal of PROs will generally be entitled,
subject to certain limitations, to credit the UK tax against its US
federal income tax liability in respect of such gain.
United Kingdom
Taxation of payments on the PROs
Payments on the PROs will constitute interest rather than
dividends for UK withholding tax purposes. However, the PROs
will constitute “quoted eurobonds” within the meaning of section
349 of the Income and Corporation Taxes Act 1988 and therefore
payments of interest will not be subject to withholding or
deduction for or on account of UK taxation as long as the PROs
remain at all times listed on a ‘recognised stock exchange’ within
the meaning of section 841 of the Income and Corporation Taxes
Act 1988. In all other cases, an amount must be withheld on
account of UK income tax at the lower rate (currently 20%)
subject to any direction to the contrary by HM Revenue &
Customs under the Treaty and except that the withholding
obligation is disapplied in respect of payments to persons who
the company reasonably believes are within the charge to
corporation tax or fall within various categories enjoying a special
tax status (including charities and pension funds), or are
partnerships consisting of such persons (unless HM Revenue &
Customs directs otherwise). Where interest has been paid under
deduction of UK withholding tax, US Holders may be able to
recover the tax deducted under the Treaty.
Any paying agent or other person by or through whom interest
is paid to, or by whom interest is received on behalf of, an
individual, may be required to provide information in relation to
the payment and the individual concerned to HM Revenue &
Customs. HM Revenue & Customs may communicate this
information to the tax authorities of other jurisdictions.
HM Revenue & Customs confirmed at around the time of the
issue of the PROs that interest payments would not be treated
as distributions for UK tax purposes by reason of (i) the fact
that interest may be deferred under the terms of issue or
(ii) the undated nature of the PROs, provided that at the time
an interest payment is made, the PROs are not held by a
company which is ‘associated’ with the company or by a
‘funded company’. A company will be associated with the
company if, broadly speaking, it is part of the same group as
the company. A company will be a ‘funded company’ for these
purposes if there are arrangements involving that company
being put in funds (directly or indirectly) by the company, or an
entity associated with the company. In this respect, HM
Revenue & Customs has confirmed that a company holding an
interest in the PROs which incidentally has banking facilities
with any company associated with the company will not be a
‘funded company’ by virtue of such facilities.
Interest on the PROs constitutes UK source income for UK tax
purposes and, as such, may be subject to income tax by
direct assessment even where paid without withholding.
However, interest with a UK source received without deduction
or withholding on account of UK tax will not be chargeable to
UK tax in the hands of a US Holder unless, in the case of a
corporate US Holder, such US Holder carries on a trade in the
UK through a UK permanent establishment or in the case of
other US Holders, such persons carry on a trade, profession or
vocation in the UK through a UK branch or agency in
connection with which the interest is received or to which the
PROs are attributable. There are exemptions for interest
received by certain categories of agents (such as some
brokers and investment managers).
EU Directive on taxation of savings income
The European Union has adopted a directive regarding the
taxation of savings income. The Directive requires Member
States of the European Union to provide to the tax authorities
of other Member States details of payments of interest and
other similar income paid by a person to an individual resident
in another Member State, except that Belgium, Luxembourg
and Austria are instead imposing a withholding system for a
transitional period unless during such period they elect
otherwise.
Disposal (including redemption)
A disposal (including redemption) of PROs by a non-corporate
US Holder will not give rise to any liability to UK taxation on capital
gains unless the US Holder carries on a trade (which for this
purpose includes a profession or a vocation) in the UK through
a branch or agency and the PROs are, or have been, held or
acquired for the purposes of that trade, branch or agency.