Stamp Duty on Loans—Taxation of an Anti-Investment Nature

Mary Psylla, Head of Tax & Legal at PwC Greece, talks to Business Partners magazine about stamp duty, the territoriality principle, and the need to modernize legislation in order to attract foreign investment and facilitate economic growth.

To begin, give us some background on the issue of stamp duty in the Greek context.

First of all, let me point out that the Greek Stamp Duty Code is a rather old piece of legislation, introduced in 1931. Trying to apply legislation introduced almost 90 years ago to today’s ways of financing and doing business is a challenge in itself.

Based on the Stamp Duty Code, all written agreements concluded and executed in Greece are subject to stamp duty (the so called territoriality principle).

Specifically, loan agreements concluded and executed in Greece between legal entities are subject to stamp duty at the rate of 2.4%. Open withdrawal/deposit accounts between legal entities concerning cash deposits and cash movements related to loans are also subject to 2.4% stamp duty, calculated for each accounting year on the higher amount of either the debit or the credit balance.

Even in the absence of a written agreement, stamp duty may be imposed on transactions evidenced by accounting entries where the necessary elements for the legal characterization of the transaction can be clearly identified by the relevant accounting entries.

However, any written agreement concluded and executed outside Greece falls outside the scope of the Greek Stamp Duty Code. Therefore, as clarified by the Ministry of Finance (POL 1027/90), the territoriality conditions of loan agreements signed abroad are not subject to stamp duty in Greece provided they are executable abroad and do not relate to movable or immovable property situated in Greece.

What is the main issue Greek enterprises currently face in light of this old legal framework?

The main issue is that, during audits, tax auditors impose stamp duty and penalties on intercompany loans and other more modern types of financing (cash pooling, netting, current accounts, financing granted by treasury and finance centers situated abroad), in practice refusing the application of the territoriality principle. Unfortunately, the relevant jurisprudence also advocates in this favor.

In summary, the Greek courts’ jurisprudence accepts that a loan agreement is executed in Greece and is therefore subject to Greek stamp duty in the following cases:

  • where the loan amount is deposited by the foreign lender to a bank account kept by the Greek borrower outside Greece and the said amount is remitted to the borrower’s bank account in Greece within the same day or the following few days;
  • where the loan agreement explicitly provides that the loan amount is to be deposited by the foreign lender in the borrower’s bank account outside of Greece, for subsequent transfer to a Greek bank account of the borrower;
  • where no actual payments (physical cash transfers) are made but loan balances are settled through accounting entries offsetting relevant claims and liabilities between the parties, lender and borrower in Greece.

On the other hand, the Athens Administrative Court of Appeal accepted in a recent judgment that where a Greek lender has transferred funds abroad to a foreign borrower, the relevant funds are set at the disposal of the foreign company outside Greece; therefore, this agreement is considered as executed abroad and is not subject to stamp duty in Greece.

The problem is that the Greek tax authorities tend to apply the above jurisprudence in a broader manner, even when transfers do not take place within the same day or where there is no specific reference in the agreement regarding the remittance of the loan amount in Greece. Indeed, they have been quite aggressive in the imposition of stamp duty also in case of loans concluded and executed abroad, where the funds were eventually, at any point, transferred to Greece.

Are there any arguments against these assessments?

There are indeed many and diverse, depending on the specific facts of each case. I would like to focus on the two which I consider relevant to all cases.

Firstly, the Ministry of Finance has specified the terms and conditions for the exemption of the loans that are concluded and executed abroad (POL 1027/1990).

  • The agreement should be concluded abroad, i.e. signed by both parties outside Greece but not before a Greek Consulate Authority (also regarded as Greek territory).
  • The agreement should create no executable obligations in Greece, e.g. it should not be secured through mortgage of property located in Greece.
  • Any obligation to grant the loan amounts and repay capital and interest, must be executed abroad. This means that the delivery of the amounts from the lender to the borrower must take place abroad or be transferred to the borrower’s bank account outside of Greece.

Moreover, it is explicitly stipulated that subsequent cross-border transfers of the funds from the foreign bank account to a bank account held by the company in Greece do not impact the recognition of the territoriality exemption.

As long as the various conditions above are met, loan transactions should not be subject to stamp duty, irrespective of the fact that the Greek borrower/lender may have recorded the latter loan agreement in its accounting records kept in Greece or that the funds have been at some point remitted in Greece.

For several years, the authorities used to examine loans in light of the above guidelines and did not impose stamp duty on loan agreements when the above conditions were met. However, this practice changed, and this change was not based on the issuance of more recent guidelines by the tax administration. Taxpayers who used to follow the aforementioned guidelines suddenly faced extremely high assessments. These assessments violate the constitutional principles of legal certainty and legitimate expectation of citizens.

The second argument relates to whether the interest-bearing loans could be considered as transactions falling within the scope of VAT. If yes, VAT will not be imposed on the relevant transactions since they are exempt. However, the crucial element to determine whether a transaction may be subject to stamp duty is not whether VAT is actually imposed on the transaction, but rather whether this transaction does fall within the scope of VAT.

The Greek courts in their recent rulings, on the other hand, do not seem to accept this argument, without any particular reasoning. Following the relevant jurisprudence of the European Court of Justice, it could be argued that interest-bearing loans, in principle, fall within the scope of VAT—although VAT exempt—and therefore may not be subject to stamp duty. The Greek Supreme Administrative Court has also ruled that the granting of credit in open account falls within the scope of VAT—although VAT exempt—and therefore stamp duty cannot be imposed on such transactions.

There seem to be conflicting arguments as to the cases stamp duty applies to. What is the conclusion from the above?

Based on the above, it is clear that the courts’ decisions tend to refute the territoriality exemption of the loan contracts, invoking a concrete relevant term by virtue of which the loan amount is ultimately remitted in a Greek bank account of the borrower.

In practice, tax auditors apply the above jurisprudence broadly, without any prior amendment of the guidelines by the tax administration.

This practice creates obstacles to entrepreneurship. Multinational groups are forced to operate in Greece in a different way than they do in other countries, having abnegated arrangements such as cash pooling, netting and other treasury products that facilitate their financing, reduce the related cost and provide obvious economic benefits at group level. In many cases, these obstacles in the financing of their Greek subsidiaries can become the basis for multinationals to consider operating from other countries. Greek groups, and Greek companies, are deprived of cost efficient financing instruments because of this growing issue.

When it comes down to it, what is your stand on this form of taxation?

I cannot help but wonder, in a country like Greece, where investments are imperative to overcoming the current economic situation, do we really want to impose stamp duty of 2.4% on capital flowing into the country? Is this an incentive to attract new investments? Do we really want to impose stamp duty of 2.4% on the repayment of these amounts and on the accrued interest?

Definitely not. This is a disincentive for potential investors, a disincentive we should avoid in order for our economy to start growing again and in order to rebuild investor, as well as internal, trust. Public revenues from stamp duty may be important for our country’s future and to rebuilding competitive advantage. However, equally important is the harm this indiscriminate application does to the business environment and will have a significant impact on the market over the coming years. Our proposal is simply the abolition of this anachronistic taxation.

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