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Access to financing through euro bonds issued abroad has become more difficult for domestic banks and large companies. While in most countries of the European Union the interest from these bonds is fully exempt from withholding tax, in the Czech Republic it is significantly more complicated starting this year.
So-called Eurobonds are acquired by, for example, foreign pension funds, asset managers and other large investors. In addition to banks, the issuers of euro bonds include, for example, large companies from the energy sector such as ČEZ or the EPH holding company.
According to the new rules, the Czech issuer of euro bonds must obtain from individual investors tax declarations and other documents that prove the right to tax exemption.
“The issuer as a tax payer functions as an extended arm of the state, responsible for the correct collection of tax. This also applies to the application of any tax advantage,” commented Michal Dušek, a tax specialist from the law firm Allen & Overy.
If the issuer does not obtain the documents from the bondholders, the state can assess the tax on it. Financing through euro bonds would thus become significantly more expensive. According to experts, this would also mean a reputational risk for companies. The barrier is so serious for companies that, according to SZ Byznys, several large bond issues planned for the first half of this year did not take place at all.
“Given that the issuer very often does not know the investors in its bonds, it has a limited opportunity to obtain these documents. In such a situation, he is essentially obliged to pay withholding tax in the maximum amount of 35 percent of the value of the interest paid. It is not necessary to explain that this significantly increases the cost of Eurobonds on the part of issuers from the Czech Republic, moreover, these issues have a comparative disadvantage against issues from other EU countries,” said Jan Friček, financial director and member of the board of directors of Moneta Money Bank.
A significant increase
The domestic group Energo-Pro, which owns and operates a portfolio of hydropower plants and electricity distribution networks in Bulgaria, Georgia and Turkey, sees it similarly. Financing through euro bonds is crucial for the company. Since 2017, it has already issued three issues totaling more than one billion euros.
“The withholding tax would make this financing, for which we currently do not have a suitable replacement, up to 35 percent more expensive for the company in the worst case scenario. For example, financing in the amount of 500 million euros with interest of five percent per year, and therefore annual interest costs of 25 million euros, could increase the withholding tax by almost another nine million euros annually. This is a really significant increase,” described Martin Rejna, Energo-Pro’s executive director for development.
In August, the Association of International Capital Markets Service Providers published procedures for issuers to secure all necessary information from investors in euro bonds.
“Without the existence of said procedures, issuers had no way of obtaining said information. In practice, this led to their considerable commercial disadvantage compared to foreign issuers of similar instruments, to the emergence of tax and reputational risks, and generally made access to this important market more difficult,” commented Petr Vybíral, a partner in the law firm Allen & Overy. The latter significantly participated in the creation of the mentioned procedures in cooperation with the international securities depositories Euroclear and Clearstream.
Burden for investors
All affected market players agree that the easiest way would be to cancel the withholding tax on Eurobonds and return to the regime valid before January 1 of this year.
“The current situation represents a burden for investors in the form of additional administration regarding proof of real ownership and tax domicile without any significant contribution to the state budget. In our opinion, it should be more in the interest of the state to support the access of Czech companies to various sources of financing. Especially nowadays, when the situation on the financial markets is deteriorating – and with it the financing conditions,” says Energo-Pro manager Rejna.
The tax amendment came from the Ministry of Finance, when Alena Schillerová (ANO) headed the office. But the resort is behind the change even under the new management.
“Regarding the aforementioned amendment of the Income Tax Act, this is a completely common practice in the world in cases where the law or an international treaty stipulates the conditions for the application of a more favorable tax regime. The Ministry of Finance does not have information about the mentioned cost barrier associated with the subject amendment of the law, therefore we are not currently considering amendments in the given area,” said Šimon Blecha from the office’s press department.