International financing structures: increased focus on withholding tax

The ability to obtain withholding tax relief on interest payments is crucial in many international financing structures. For borrowers, without treaty relief, the cost of borrowing from a non-domestic lender increases significantly; in the absence of relief, domestic withholding tax is likely to apply, so the borrower must increase the payment due to the lender, under a so-called gross up clause. This is not entirely one-way; a lender based in a jurisdiction without access to a network of favourable tax treaties is likely to find it too difficult to lend money to foreign borrowers at similar returns to those lenders with access to a wide treaty network. These issues arise not only for third party lenders, but also where a group wishes to finance its international operations. In either case, the parties involved will want to prevent any withholding tax leakage.