Much of the focus on the tax implications of Brexit has rightly been on VAT and import duties, and the loss of the Parent Subsidiary Directive and the Interest and Royalties Directive.
Buried within the tax regime for many EU member states, however, are a number of other rules that apply specifically to other EU/EEA member states, and therefore the position of UK companies is likely to change following Brexit. Here is a selection of issues that we have already encountered:
The loss of the protection of the Parent Subsidiary Directive will mean that the withholding tax rate on dividends will revert to the treaty rate (in most cases zero, but with Italy and Germany being notable exceptions). Care will also need to be taken when relying on the PSD for dividends paid to EU companies ultimately held by UK resident shareholders – in Spain, for example, this may bring the PSD anti-avoidance rules into play.
Under the French participation exemption, only a fraction of dividend income from a subsidiary is taxable. If the paying company is in the EEA under certain conditions this fraction is usually 1%, but it is likely to increase to 5% for dividends paid by a UK company post-Brexit.
UK companies will lose the benefit of the Cadbury Schweppes defence post-Brexit. In addition, there is an increased risk of a UK entity being an Italian CFC, as the UK will no longer be on the “white list”.
- Share for share exchanges
In Spain, Germany, Portugal and Italy, a shareholder may roll over a capital gain on a share for share exchange only if the acquiring company is in the EU/EEA.
- Italian entities borrowing from UK banks
An Italian entity borrowing medium term from a UK bank will cease to be able to rely on Italy’s intra‑EU withholding tax exemption for interest post-Brexit and will instead have to withhold at the treaty rate (10%). In addition, such loans will no longer be able to qualify for the indirect substitute tax and will instead be subject to full Italian capital duties. Loan documentation being negotiated now may need to reflect this.
- Movement of individuals
Workers who move around the EEA generally need to make social security payments only in their “home” country. Many member states have less onerous exit tax rules for individuals moving to other member states. For example, we have seen concerns that students might trigger German CGT exit charges on family shareholdings in Mittelstand companies if they study in the UK post-Brexit.
- Exit taxes, losses and groups
In addition to the loss of the Merger Directive, provisions allowing the deferral of exit taxes on a migration from a member state to the UK and the offset of UK losses against other EEA income are unlikely to be applicable, and it may no longer be possible to trace tax grouping through a UK company, post-Brexit.
- Branch incorporation
A UK parent company that has relied on the Merger Directive to incorporate a German branch tax free might subsequently fail the required seven year holding period on the UK leaving the EU.
- US treaties
Certain US treaties take factors such as ownership by EU residents and trading on EU stock exchanges into account for the purposes of determining entitlement to treaty benefits. For example, post-Brexit, the UK will no longer be part of the Dutch “primary economic zone” for the purposes of the Netherlands/US Treaty, so share trading in London will cease to be counted as “good” trading in shares of a Dutch company. Similarly, a Dutch holding company wholly owned by a UK publicly traded company will no longer qualify for treaty benefits under the Netherlands/US Treaty, because post‑Brexit the UK parent will no longer be considered an ‘equivalent beneficiary’.
There is, of course, no way of knowing at this stage which issues will be dealt with as part of the Brexit negotiations. Businesses will want to continue to enjoy the advantages of the UK’s tax regime, so care will need to be taken to identify all of the relevant issues before March 2019.
This briefing was co-authored by the following firms:
- Bredin Prat
- De Brauw Blackstone Westbroek
- Hengeler Mueller
- Uría Menéndez