Czech Republic: Application of thin capitalization test to interest paid on bonds (court decision)

A court decision concerning the application of thin capitalization test to interest paid on bonds

A court decision on application of thin capitalization test to interest paid on bonds

A regional court held that the thin capitalization rules did not apply to interest paid on bonds issued by a commission agent on behalf of individual principals.

The tax authorities argued that the credit relationship in respect of the bonds was between the commission agent (rather than the investors in the bonds) and the individual principals, and as such was a credit relationship between related parties to which the thin capitalization test was applicable.

The regional court disagreed, finding that the economic substance of concluding the commission agency agreement and issuing and underwriting the bonds was to obtain external funding for the principals and not to provide credit to the principals by the related party commission agent. As this involved obtaining external funding from third parties rather than providing a credit financial instrument within a group, a thin capitalization test must not be applied to interest paid on the bonds issued.

Read a January 2023 report prepared by the KPMG member firm in the Czech Republic


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