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Withholding tax regime and Eurobonds

Matija Repolusk, Wolf Theiss, Ljubljana Gregor Zorman, Wolf Theiss, Vienna

On 29 December 2009, the amendments to the Slovenian Tax Procedure Act (Zakon o spremembah in dopolnitvah zakona o davcnem postopku) were published in the Official Gazette of the Republic of Slovenia, which introduces a new chapter III.a (Articles 383b to 383g) regarding withholding tax on income from materialised and dematerialised financial instruments, if such income is paid to a person who receives it for the account of a third party. These new rules will become applicable on July 1 2010. Until then, further regulations providing more detailed rules are expected to be adopted.

Based on these amendments, an issuer of a debt security (being a debtor under a debt security in respect of interest payments and a resident of Slovenia for tax purposes) is shall in general be obliged to deduct withholding tax at the highest withholding tax rate determined by any domestic provision regarding interest income, without the application of any exemption or reduction of the withholding tax (currently 20%) on all interest payments under the debt security, as long as interest is paid to a person who receives it for a third party's account (a paying agent). The beneficial owners of the income may, however, file a claim for relief from withholding tax if they are – under applicable domestic tax rules or a double taxation treaty – entitled to an exemption from, or a reduction of, the withholding tax.

Under the amended Tax Procedure Act, a recipient of interest income shall be deemed to have received interest income for a third party account if the recipient's business activity is receiving the income for the account of a third party or the person is known to do so, even if only occasionally; or the address for the payment of such income differs from the registered address of the recipient of such income, unless the recipient provides a written statement indicating that the income is (partly) received for its own account.

The regime described above would therefore also apply to Eurobonds issues because, under a Classical Global Note Structure or a New Global Note Structure, an issuer will be required to presume that a holder of a global note receives interest payments for a third party's account.

This issue was already brought to the attention of the Slovenian Ministry of Finance, which, for the time being, insists on collecting withholding tax on income from financial instruments, but is prepared to amend the law and make certain exceptions for Eurobonds. Several amendments were proposed by major Slovenian banks and law firms, including ours, which aim to achieve similar effects as those of the UK-quoted Eurobond exemption.

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