Tax Efficient and Simplified Non-Equity Private Financing

    View Author August 2012

    Interest income on bonds with the nominal value of CZK 1 issued before the end of 2012 subscribed by individuals is tax free until their maturity. After 1 August 2012, no regulatory approval by the Czech National Bank is required for bond issues.

    Bonds, which are often used in non-equity private financings in lieu of loans, are now finally available to Czech borrowers under local rules. Whether you need friends & family money to start a new business or a mezzanine loan for a new project, you may give a better liquidity comfort to your lenders. Bonds are easier to transfer than loans and thus are more liquid instruments. If a bondholder needs cash before maturity, he or she can sell the bond (usually without consent of the other bondholders and/or the borrower) to another investor. The issue terms and their amendments will no longer be subject to approval by the Czech National Bank.

    Under the amendment of the Act on Bonds, the Czech National Bank will no longer supervise bond issuances where the investor is not required to publish a prospectus (non-public bond issuance). In the case of an offer designed for a limited circle of persons in the EU member state where the offer is made, the obligations related to the public offer of investment securities (i.e. basically the obligation to publish the prospect or an alternative informative document) does not apply to offers addressed to less than 150 persons (not including qualified investors).* The Czech National Bank’s supervision will be limited to only the issuance of bonds traded on public markets, as in such case the issuer is obliged to have its bond prospectus approved.

    Another restriction that will no longer apply is the requirement that the bond issuer be a legal entity. Once the new amendment comes into effect, both legal and natural persons can issue bonds.

    Furthermore, the definition of a bond will become more inclusive, so that it relates to all securities with the attached right to pay an amount owed. In this way, the Ministry of Finance seeks to prevent issuers from circumventing the legislation.

    The amendment will also make it possible to issue documentary bonds in the form of security to order. Therefore, like a bill of exchange, bonds will be transferrable by endorsement, thereby allowing ascertainment of their owner at any time and eliminating the uncertainty previously accompanying the issuance of bonds in the form of bearer securities, the owner of which was not ascertainable from the instrument.

    Another novelty is the possibility of bondholders holding electronic meetings, making it unnecessary to convene costly in-person meetings, particularly where there is only a small number of existing bond owners. It will also be possible to resolve individual matters without meeting in person.

    If you have any questions regarding the Act on Bonds amendment, please contact your principal Squire Sanders lawyer or one of the lawyers listed in this publication.


    * According to the opinion of the Czech National Bank, with respect to Section 35(2)(b) of the Act on Business Activities on the Capital Market, which regulates the exception from the obligation to publish the security prospectus.