An Israeli citizen has decided to invest in the Czech Republic and a large part of this investment will be financed with debt. He wants to know whether he can minimize withholding tax by structuring the loan through an offshore company, as he knows that Czech withholding tax on interest paid to Israel is as high as 10%. Interest received in Israel is subject to 36% income tax.

Suggested solution:

A tax effective solution could be a loan to each other through a Luxembourg intermediate company (Luxembourg Co). A tax treaty between the Czech Republic and Luxembourg provides for a 0% withholding tax rate. A ruling can be obtained from the Luxembourg tax authorities, thus minimizing exposure to Luxembourg tax. Luxembourg domestic law stipulates that there is no withholding tax on interest paid abroad. His interest can, therefore, be paid to any country, including offshore financial centres, without attracting any more tax.

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