The Bank of Zambia (BOZ) has recently removed the withholding tax applied on discount bonds issued by the government to promote the development of the secondary market in government bonds.
The withholding tax, applied on all income earned on government bonds at a rate of 15%, is removed for all existing discount bonds and those issued since January 1st, 2016.
The discount bonds pay a fewer rate than the average in the market since they are issued with a discount from the principal and don’t pay any coupon until it is payback on the maturity date.
Government bonds with coupon, will still be subject to withholding tax since they pay a higher rate as they are issued without discount and pay interests every six months until the principal is payback on the maturity date.
According to the BOZ, the measure seeks to make the discount bond more competitive in the secondary market since their lower rates were further reduced with the application of the withholding tax.
Currently Zambian government bonds are paying 23.00%, 23.50%, 27.99%, 20.00%, and 22.50% on maturities of 2, 3, 5 and 7, 10, and 15 years respectively.
These rates are up from the 9.00%, 10.00%, 11.00%, 12.00%, 13.00%, and 14.00% proposed by the BOZ at the issuance date.