An Israeli investor is investing in the Czech Republic. A substantial part of the investment will be financed with debt. As the Czech withholding tax on interest paid to Israel is 10%, he wonders whether this withholding tax can be avoided by structuring the loan through a third country. The Israeli investors wish to avoid paying this tax for internal reasons.
Interest paid to Israel by a debtor in the Czech Republic is subject to a 10% interest withholding tax (as reduced by the tax treaty between the two countries). Interest received in Israel is subject to 36% income tax.
A back-to-back loan via a Luxembourg intermediate company could be a tax-effective solution. The tax treaty between the Czech Republic and Luxembourg provides for a 0% withholding tax rate. In Luxembourg, a ruling can be obtained from the tax authorities, thus minimising exposure to Luxembourg tax. According to Luxembourg domestic law, there is no withholding tax on interest paid abroad.
Therefore, the interest can be paid to any country (including offshore financial centres) without attracting any further tax.