With the issuance of both Slovenian & Croatian retail bonds, we decided to present you with the tax obligations an investor would have to pay in both of these specific scenarios, in the case of retail bonds for both countries.
Croatia was the first of two presented countries to issue retail bonds, while Slovenia recently followed the same footsteps. First of all, we feel the total amount issued difference should be emphasized. The Croatian government was very active in promoting the debt capital market in 2023. In March it issued EUR 1.8bn of local 2-year bonds out of which EUR 1.3bn was allocated to retail at 3.65% YTM. And, again in November government issued EUR 715m of treasury bills allocated to retail. For comparison, the Slovenian volume of the issuance is EUR 250m, which is way less compared to the Croatian total issuance and not at all ambitious amount.
Let’s compare tax & fee obligations and returns one would have if invested in Croatian & Slovenian retail bonds
For the case of simplicity, we will assume an investor will buy “risk-free” government bonds in its own domicile country. In other words, for a Slovenian resident or institution an example buying retail government bonds issued by the Slovenian Ministry of Finance and vice versa, for a Croatian resident or institution buying Croatian retail bonds. If we were to switch any variable, we note that a more complicated tax/fee structure is applied. However, you can contact InterCapital for any further questions on that matter.
We note that interest from Croatian retail bonds is tax-free, which is not the case for Slovenian retail bonds. This means that Croat will have a better tax treatment compared to the Slovenian. While Croats will not have to worry about tax on interest at all, Slovenian investors will have to pay for any interest above EUR 1,000. Below this amount, interest is tax-free in Slovenia, while above that amount Slovenian will have to pay a 25% tax rate applied. Further, another form of tax might be applied, depending on the time frame of an investment. If a Croatian investor decides to sell a bond <2 years of holding, just like for any other financial instrument, he will have to pay a capital gain tax of 12%. Here, Slovenian unfortunately, again, has a suboptimal tax treatment. Investors would have to pay a 25% tax rate for a holding period under 5 years! And for a holding period above 5 years, he is still not levied the tax completely, rather only partially depending on the whole period. Overall, the optimal strategy for a Slovenian investor would be to buy and hold bonds until maturity. But, even in that case, he would have to pay capital gains tax as Slovenian retail bonds are not perpetual.
Nevertheless, we find Government bonds as a perfect “risk-free” product for learning and experience for both Croatian & Slovenian retail investors, still learning about opportunities offered by shares/bonds. With the current expectations of easing inflation in 2024 to c. 3%, we think it is important for the retail base to see they can achieve a low single-digit yield by accepting the lowest possible risk in the context of capital markets. By accepting low single-digit yields on bonds, investors can “neutralize” real returns on their portfolio, rather than just let inflation eat their wealth. Especially with the past retail bond yield of 3.65% and expected inflation of 3%, an investor would yield a real 0.65%. Even after taking brokerage & custody fee, an investor would enjoy positive returns.
Croatian Government Bonds yield curve
Source: Bloomberg, InterCapital Research
Slovenian Government Bonds yield curve
Source: Bloomberg, InterCapital Research
In that context, the Croatian Ministry of Finance announced yet another issuance of our retail bonds until the end of March on the back of the successful aforementioned issuances. We see this as a strong opportunity for further education of our (still small) retail base. What should we expect? Taking into account current market conditions and expectations, yield should amount to c. 3% or slightly above. More or less, average 2024 inflation is expected in the same range – meaning real invested wealth might remain “undamaged” while being exposed only to a “risk-free” investment. It’s more of a hedge against inflation, rather than a yielding investment. Finally, to put into context for our retail base, the mentioned c. 3% of expected return is still significantly above the interest on deposits in banks, making it undoubtedly a better risk/reward alternative. By investing in government bonds, as opposed to bank deposits, an investor can at least achieve a neutral real return.