The requirement to deduct tax from UK source interest payments (ie Withholding Tax) is one of the key factors to be considered in the context of a bond issue in the UK. Where a tax deduction is required, this is:

1. •

   at best, a cash flow disadvantage, ie the UK tax withheld can be set off against other UK or foreign tax due on the interest received, and

2. •

   at worst, a permanent cost, ie the bondholder does not pay tax or pays less tax than the amount withheld on the interest received and cannot reclaim the tax withheld

Clearly in either case a bondholder would rather receive the interest gross (ie without any deductions) and, as a result, whether deduction of tax is going to be required on a bond is a very important consideration for the issuer of the bond and the managers or arrangers who are seeking Subscribers for the bond. In the context of retail Bonds (ie where the bond is issued to consumer Investors), market practice is certainly to expect bonds to pay interest