UK tax legislation now contains two sets of provisions which provide tax relief for Ijara-based transactions.
First, relief is available from multiple SDLT charges. Providing that certain qualifying criteria are met, a single SDLT charge will be levied on the acquisition from the financing bank, and relief will be granted from other SDLT charges which would have arisen as the Ijara transaction is completed. As long as the entity providing finance is a bank or a wholly owned subsidiary of a bank, it is relatively straightforward to satisfy the tests which qualify a purchaser for this relief.
Secondly, relief is available from withholding tax charges on interest (or deemed interest) in some circumstances. The starting position is that there will be a withholding tax charge on UK source interest (actual or deemed interest) unless the lender is (a) a UK Bank or a UK Branch of a non-UK Bank, (b) a UK resident company (a bank or a wholly-owned subsidiary thereof), or (c) resident in a jurisdiction which has a treaty with the UK which provides for no withholding tax. The treaty route will only be effective for deemed interest payments, if there is a specific provision in the relevant treaty. Importantly, the Treaty with Saudi Arabia is clear on this point. As a result, there is potentially no withholding tax on deemed interest payments where the lender is a Saudi Arabian based financial institution.
In summary, an Ijara-based structure as referred to above will normally qualify for the SDLT exemption and it will, from April 2010, also mean that there are no UK withholding taxes on deemed interest payments provided that the lender is a financial institution which is resident in Saudi Arabia.