Interest withholding on corporate bonds held by credit institutions; still a long way to go

Date: 31st March 2022

State Legal Council, Opinion no 165/2021;

1. Opinion no 165/2021 (the “Opinion”), published earlier this year, aims at interpreting and resolving the long pending issue of whether interest payments, under corporate bonds issued by Greek societe anonymes, to holders being credit institutions are subject, or not, to withholding tax.

The State Legal Council, following a query to this effect by the Directorate for Direct Taxes of ΑΑDΕ (the State Independent Authority for Public Revenues), interpreting the income tax law provision, under which “interest payments under loans granted by credit institutions, including default interest payments, as well as interest payments from interbank deposits, are exempted from tax withholding” (L 4172/20213, art 64 par 6) (the “Provision”), opined that “interest payments”, under corporate bonds issued by Greek societe anonymes, to holders being credit institutions do not fall within the ambit of said exemptive provision, and are thus subject to withholding tax (currently set at the rate of 15%). The interpretation applies to interest from bond loans received, irrespective of the number of bonds held by the credit institution, and whether acquired – subscribed for upon issue or at a later stage.

2. Opinion no 165/2021, ruling in line with secondary legislation enacted in the past, was accepted and adopted by the Directorate for Direct Taxes; AADE Circular no E. 2022/25.02.2022 (the “Circular”) incorporates its rulings and dictates for its implementation.

It is anticipated that both the Opinion, and the Circular, will put an end to relative interpretation issues, lasting for almost a decade; actually, since the enactment of the withholding tax exemptive Provision back in 2014.

Still interpretation guidelines may be treated as contradictory, controversial, vulnerable to criticism; an outline of relative considerations is commented upon below;

3. Bond loans not to be included in the definition of “loans or credit” granted by credit institutions;

The Opinion, focusing on the interpretation and definition of the term “loan” as used in the Provision, eventually resolves that the term does not encompass bond loans when (only) subscribed for by credit institutions, the rational being that notwithstanding the fact that bond loans fall within the definition of the term “loan”, banking law when referring to loan activities does not explicitly refer to bond loans; as a result financing under a bond loan structure, may not be treated as an integral part of the loan/credit business carried out regularly by a credit institution as under the banking law.

Nowadays said approach may be questioned as obsolete, and outside the scope of the rules; considering that bond loans are long recognized, and in use for the financing of both credit institutions and enterprises satisfying the criteria, the interpretative approach above may need be reviewed; State Legal Council, Opinion no 241/1994 rulings may be relevant and worth reviewing in this respect; Opinion no 241/1994 interpreting the term “loan” under similar conditions, though not identical circumstances, ruled that the tax exemptive provisions applied to bond loans provided only, bonds under the bond loan were initially subscribed for by credit institutions; i.e. irrespective of whether bonds were subsequently transferred to third parties.

4. Interest payment under a bond loan is a distinct type of interest, treated separately;

Under the Opinion interest under the bonds, forms a distinct category of “interest payments”, is treated separately, and tax exempted when only especially and explicitly provided for in the law; accordingly reference to the Provision to “interest payments”, does not include interest under the bonds;

To support said treatment the Opinion refers to the definition of the term “interest payments” for the purposes of income tax law (L 4172/2013, art 37),  under which “The term interest means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s profits, and in particular, income from deposits, government securities, debentures and bonds, whether or not secured, and any type of loan arrangement, including premiums, repos/ reverse repos and prizes attaching to such securities, bonds or debentures.”

Mere reference to article 37 of income tax law as above, supports argumentation that the wording “in particular” is used to clarify the definition of the term, and definitely not to create a sub-category.  It is further noted that according to the introductory report to the law, “the definition of the term “interest” follows and is aligned with the definition of the term “interest”, as provided for in the relative clause of the OECD Model Tax Treaties, and includes “all kinds of debt-claims, whether or not secured, whether or not carrying a right to participate in the debtor’s profits.”

Considering the above, the distinct and separate treatment approach, adopted in the Opinion, may be treated as at stake based on the wording of the law and its scope of application, as implied in the law’s introductory report and described in article 37 of income tax law.

5. Numerous clauses of withholding tax exemptions;

The Opinion adopting the view that, interest from  bond loans does not fall within the scope of the term “interest payment” since bond loans may not be treated as falling within the ambit of the definition “loan or credit” granted by a credit institution, goes on arguing that the law, enumerating specific tax withholding exemptions, provides that in addition to interest from bank loans (consumer, housing, credit cards, corporate, etc.), late payment interest and interest form interbank deposits are also exempted from withholding tax.

Said argumentation may not withstand the OECD Model Tax Treaties test above, and has to be reviewed; Both the 2008 and 2010 OECD Model Tax Treaties, in force as at the enactment of the Provision under examination, explicitly provided that the interest definition (as further mirrored above into Greek income tax legislation) includes ““The term interest means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s profits, and in particular, income from deposits, government securities, debentures and bonds, whether or not secured, and any type of loan arrangement, including premiums, repos/ reverse repos and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this article”.

It is thus concluded that the wording of the Provision includes i. interest payments (including interest form bond loans) as defined in article 11 of the OECD Model Tax Treaties and Greek income tax law, ii. late payment interest – penalty charges for late payment (which are explicitly not included in the definition of article 11 of the OECD Model Tax Treaties and Greek income tax law), and iii. interest from interbank deposit.

Exemptions under ii. and iii. above, are set in addition to “interest payments” as defined under the OECD Model Tax Treaties and Greek income tax law provisions.

In light of the above it may need be considered whether the Opinion ruling that  “interest from bond loans may not be implied as included in the definition of interest subject to the withholding tax exemption, since it is not explicitly included” accurately reflects the interest definition as given in the law and interpreted in its introductory report and applicable OECD Model Tax Treaties provisions to date.

6. Rules regarding interest withholding tax payment on bond loans granted by credit institutions;

As a last point for further deliberation in the context above, it is noted that whilst the Directorate for Direct Taxes under the Circular adopts the view that bond loans do not fall within the activity of credit institutions under the category “granting loans or credit”, it nevertheless treats same interest payments under bond loans as subject to the common rules applicable for interest accounting and taxation as for bank loans and credit, granted by credit institutions, under the banking law.

For any questions and further information on the above, please feel free to reach out to Smaro Anagnostou at S.Anagnostou@lambadarioslaw.gr.