Slovenian Withholding Tax on Interest Payments in Cross-border Financing Transactions
In cross-border financing transactions, withholding tax implications usually play a substantial role. The role of the tax lawyers is to recognize and acquaint the clients with any tax risks connected with their business operations as well as to advise on appropriate actions to address them (e.g., via negotiation and introduction of appropriate tax gross-up clauses into the agreements with foreign business partners).
The purpose of this article is to outline the regulation of Slovenian withholding tax, applicable to outbound interest payments. The withholding tax will be analysed at the following three levels: (I) at the first level, general regulation under Corporate Income Tax (CITA) will be outlined; (II) at the second level, benefits under the relevant provisions of EU Interest and Royalties Directive as implemented by Slovenian legislation will be analysed; while (III) at the third level, possible reduction of tax rate under the provisions of Double Tax Conventions concluded between Slovenia and other countries will be discussed.
Level I: Slovenian Corporate Income Tax Act (CITA)
Legal basis for the corporate withholding tax in Slovenian tax system is provided by the provision of Article 70 of the Corporate Income Tax Act (CITA), pursuant to which tax must be calculated and withheld on the payments made by residents and non-residents on Slovenian-sourced income to recipients outside Slovenia. Payments to which the withholding tax applies include payments for dividends, interest, copyrights, patents, licences, leases on real estate situated in Slovenia, services of performing artists, and services charged from low-tax jurisdictions (i.e. countries other than the EU Member States, where the general and / or average nominal profit tax rate is lower than 12.5% and where the country is included on the list published by the Ministry of Finance). The Slovenian withholding tax rate is 15%.
Case study (see diagram above): Slo Co, tax resident of Slovenia, pays interest to X Co, tax resident of country X. If assuming that country X is not an EU Member State and there is also no Double Taxation Treaty in place between Slovenia and country X, the withholding tax rate on outbound interest payments will be 15%.
It needs to be noted that some important exemptions from the withholding tax with regard to interest payments are provided by CITA. Among others, there is an exemption for interest on loans paid by the banks (Article 70, para 2) and interest arising from debt securities issued by Slovenian companies that are traded on a regular market or in a multilateral trading system in an EU Member State or in an OECD member country (for detailed conditions that need to be satisfied for this exemption to be granted, see Article 70a).
The responsibility of calculating, deducting and remitting the withholding tax in the name of the recipient of income lies with the person or entity which pays the income. Article 58 of the Tax Procedure Act (TPA) defines this person as having the status of the “payer of tax”. In general, the payer of tax is a legal entity, sole entrepreneur or a business unit of a non-resident in Slovenia (for example, a branch of a foreign company) that pays or credits the income from which the tax needs to be withheld.
It should also be noted that the payer of tax can also be the agent that pays the income to the beneficial owner as an intermediary.
Level 2: EU Interest and Royalties Directive
Council Directive 2003/49/EC (Interest and Royalties Directive or IR Directive) has been implemented into Slovenian legislation through Article 72 of the CITA, which stipulates that tax is not withheld on interest and royalty payments between associated companies of different EU Member States. For this benefit to apply, however, the following conditions have to be met at the time of the payment:
- The interest (or royalty) payments are made to a beneficial owner (for definition of this legal term, see below);
- The beneficial owner satisfies the additional criteria:
– it takes one of the legal forms listed in the IR Directive;
– it is liable to one of the taxes defined in the IR Directive; and
– it is a resident of another EU Member State (and is not deemed a resident of a third country outside EU under the relevant Double Taxation Treaty);
In this respect, it needs to be added that the benefits provided by the IR Directive only apply with regard to intra-EU payments. Hence, benefits do not apply, if interest are paid by or to a permanent establishment (of a company that is a resident of an EU Member State) that is situated in a third state.
- The paying company and the beneficial owner are related so that the one company directly participates in the capital of the other with at least 25%, or the third company directly participates in the capital of both with at least 25%;
- The condition of the minimum holding period (regarding the abovementioned participation) of 24 months is met.
In addition to this, the withholding tax exemption does not apply if the amount of interest paid is in excess of the rules determined by transfer pricing rules (Articles 16 – 19 of the CITA).
It is important to note that the term “beneficial owner” is explicitly defined by Article 72 of the CITA: Beneficial owner of interest (or royalty) payments is a company of an EU Member State other than Slovenia which is the recipient of such payments for its own benefit. The law also clarifies that an agent acting as a deputy, authorised person or authorised signatory (representative) for other person shall not be deemed a beneficial owner. Also, a permanent establishment (PE) may be treated as the beneficial owner only, if it receives the payments for its own benefit (for its own account) and not merely as an intermediary, for example an agent or authorized signatory for some other person.
The benefits under the Interest and Royalties Directive can only be claimed after the fulfilment of the requirements laid down in the Article 72 of the CITA has been substantiated by the attestation. Under the Article 377 of the TPA, the paying company has to file a request with the Financial Administration upon which the administration grants permission for exemption valid up to 1 year from the issuance. A decision to grant the permission has to be issued 3 months after the request was filed. A request has to be made separately for each payment of interest and royalties that is based on a different legal basis. The recipient company or its PE has to immediately inform the paying company or its PE of any changed circumstances that may lead to the outcome when conditions set out in Article 72 are no longer fulfilled.
In case the tax was already withheld even though the legal conditions for exemption under the IR Directive had already been fulfilled, a tax refund can be claimed (by either the beneficial owner or the payer). Financial Administration has to decide about the refund in 3 months from the date the request was filed with all the necessary proofs (it may also demand submission of relevant documentation in order to verify whether the conditions for exemption had been met).
Level 3: Double Taxation Treaties
Pursuant to relevant provisions of the Double Tax Treaties concluded between Slovenia and other countries, general 15 % withholding tax rate on interest payments may also be reduced. In this respect, it is important to note that Slovenia has so far concluded Double Tax Treaties with as much as 57 different countries. These treaties are predominantly based on the OECD Model Treaty (list of all of the current treaties in force is publicly available on the website of Slovenian Ministry of Finance).
Pursuant to provisions of Slovenian Double Tax Treaties (Article 11, in particular), the applicable withholding tax on interest payments rate is usually reduced to 10 % (e.g. Double Tax Treaty with Belgium, Canada, Russian Federation) or 5 % (e.g. Double Tax Treaty with Austria, Republic of Korea, Qatar). Some Double Taxation Treaties also include specific provisions whereby interest payments are subject to a nil withholding tax if certain conditions are met.
However, the benefits under the relevant Double Taxation Treaty may only be claimed, if the recipient of the interest payments is a beneficial owner of such payments. Unlike EU IR Directive, Double Taxation Treaties based on the OECD Model Treaty do not expressly define this term. Thus, OECD Commentary (as recently amended with regard to this concept in 2014) has to be taken into account as well as judicial interpretation of this term in various tax related disputes (e.g. famous UK Indofood, or Canadian Velcro and Prevost cases). Also, recent developments with regard to currently ongoing OECD BEPS project (especially with regard to preventing the granting of treaty benefits in certain “inappropriate” circumstances – Action 6) need to be taken into account.
Article 260 of the TPA provides that a non-resident corporate taxpayer entitled to a lower tax rate or exemption from tax in accordance with the relevant Double Taxation Treaty can apply for a relief or exemption of the withholding tax prior to the receipt of income. Whether the non-resident taxpayer is entitled to benefits or not has to be decided by the Financial Administration. The payer of income is only authorized not to withhold the tax or withhold the tax at a lower rate upon the official permission from the Financial Administration.
As a general rule, the request has to be filed for each separate payment of income. However, Article 260, paragraph 6 of the TPA in circumstances when income is being paid on a regular basis enables the Financial Administration to extend the benefits from the relevant Double Taxation Treaty for a longer period of time (not only for a particular payment).
In case the tax has already been withheld even though the company is entitled to the benefits under the Double Taxation Treaty, such company may apply for a refund pursuant to the provision of Article 262 of the TPA. Refund of the tax withheld can be claimed up to the difference between the full amount withheld and the amount required by the Double Taxation Treaty. In case the taxpayer was exempt from tax according to the Double Taxation Treaty, the full amount of withheld tax is refunded. It should be added that Article 125 paragraph 4 of the TPA generally limits a taxpayer who paid excessive tax on income to apply for a refund within a period of 5 years after the payment (or after obtaining the legal title that determined a taxpayer’s non-liability to tax).
As it has been shown, for the purposes of the assessment of tax implication of any contemplated international financing transaction, three different levels have to be analysed. Namely, general withholding tax applicable to outbound payments (15 %) under CITA may be further reduced pursuant to the provisions of the CITA implementing EU IR Directive (reducing tax rate to nil provided that relevant conditions as explained above have been met), or by relevant Double Tax Treaty concluded by Slovenia. In any case, particular circumstances of each individual case have to be taken into account (in particular, whether the recipient of the dividends may be deemed “beneficial owner,” as well as recent developments in the framework of the OECD BEPS project, especially with regard to denial of treaty benefits in certain “inappropriate” circumstances – Action 6). Thus, for the purposes of early identification of possible tax risks, it is recommended that tax specialists are consulted before entering into any transaction.