Reintroduction of exemption of non-residents’ interest income from so-called Eurobonds

On 30 September 2021, an amendment to the Banking Act was published in the Collection of Laws, which was altered during the legislative process to also include an amendment to the Income Tax Act. This amendment reintroduces the exemption of non-residents’ interest income from so-called Eurobonds, i.e. bonds issued abroad by taxpayers with registered seat in the Czech Republic effective from 1 January 2022.

During last year, this area underwent a relatively turbulent development. The original exemption of non-residents’ interest income from Eurobonds, introduced in 2014, was abolished by the 2021 tax package and subsequently reintroduced within the aforementioned amendment to the Banking Act effective from 1 January 2022. Under the transitional provisions, the original exemption remains applicable for Eurobonds issued until 31 December 2021, while the “new regime” of the exemption applies to Eurobonds issued after 1 January 2022. The two exemptions therefore follow one another without any gaps; there are, however, certain changes in the conditions for the application of the exemption (see below).

According to the explanatory memorandum, the main objective of the reintroduction of the exemption was to ensure the attractiveness of Eurobonds issued by domestic companies on international capital markets and to reduce the administrative demands placed on issuers associated with obtaining information for the correct application of withholding tax to non-residents’ interest. Moreover, in order to prevent abuse, the new wording of the provision (compared to the original one), contains an exclusion from the exemption in the case of interest paid to a non-resident that is a related party of the issuer, or that has created a legal arrangement with the issuer primarily for the purpose of reducing the tax base or increasing tax losses.

In terms of the efforts to reduce administrative demands, we believe that, given the wide burden of proof for payers regarding the application of the correct withholding tax regime, it will be necessary, besides verifying whether the recipient is a resident or not, to also verify compliance with the new conditions when paying interest income on Eurobonds to non-residents (i.e. the absence of related-party status or a legal arrangement mainly for the purpose of reducing the tax base between the recipient and the issuer), which can be quite problematic in practice. We also remind you that when paying exempt interest from Eurobonds to non-residents, which would exceed the limit of CZK 300 thousand, the payer is still obliged to submit a WHT report (“Oznámení o příjmech plynoucích do zahraničí” in Czech) to the Tax Authorities pursuant to Section 38da of the Income Tax Act no later than on 31 January of the following calendar year. No changes were introduced in this area.

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