On 23 June, the UK is holding a referendum to decide whether it should leave or remain in the European Union. A vote to leave the EU (the so-called Brexit) would not only have repercussions from a tax perspective for the UK. This article considers the potential tax consequences of a Brexit for Germany.

Germany’s role has historically been as a driver of European integration. This, together with its position as the European Union’s largest economy, means that it could be significantly impacted by the tax consequences of Brexit.

Tax harmonization The UK presents a major obstacle to the harmonisation of fiscal policy across the EU, in contrast to Germany’s broadly supportive approach on that issue. For instance, the UK vehemently opposes the calls for a Common Consolidated Corporate Tax Base (CCCTB), under which the rules for computing taxable profits would be set at the EU level but member states would be free to choose their own corporate tax rate. It is by no means alone in its opposition to the CCCTB, and adoption of this tax system across the EU would require unanimous consent from its member states. However, the loss of such an influential voice in the event of Brexit could strike a telling blow against those opposing the CCCTB, especially at a time when the European Commission is advocating strongly for its introduction.

Similarly, the proposed EU financial transaction tax would be more likely to be implemented if Brexit were to occur. The UK has been a staunch detractor of the proposal, worried that its introduction across the EU could trigger an exodus of business from its vital financial services sector. The UK has even previously launched a legal challenge to the proposal in the past, questioning its validity. Brexit could enable Germany and its other supporters to push for the tax to be introduced on an EU-wide basis, rather than only among certain member states (including Germany) as currently planned.

Withholding taxes Among other things, the EU’s Parent-Subsidiary Directive and Interest and Royalties Directive are aimed at eliminating withholding taxes on dividend, interest and royalty payments made between associated companies of different member states. In the event of Brexit, these directives would no longer be available to intra-group payments between German and UK entities.

Although the UK’s double tax treaty with Germany provides an effective alternative exemption from those withholding taxes in most circumstances, this is not the case on dividends: the treaty would only reduce the withholding tax rate to 5 per cent, rather than eliminate it altogether. If the dividend is paid to the UK parent, it may also not be able to rely on favourable case law applicable to EU resident holding companies with regard to substance requirements, etc. This may impact the UK as an attractive location for holding companies of multinationals’ EU groups. Currently, half of all EU headquarters of non-EU multinationals are based in the UK. The UK acts as a key gateway for foreign direct investment into the EU, and Germany is one of the main recipients of this investment.

There is also a potentially wider tax consequence of Brexit, beyond withholding taxes. Some areas of the German tax systems have substance requirements, where the required level of substance is higher in a non-EU context. Brexit could therefore feasibly reduce the tax efficiency of certain German/UK structures.

VAT and customs duties Brexit would likely result in the UK leaving the EU’s VAT system and ceasing to be part of the EU’s customs union. If so, customs duties and import VAT may be imposed and customs procedures may be introduced for imports between the UK and the EU. This would likely adversely impact Germany, because it currently benefits from a significant surplus on trade in goods with the UK.

Private equity and other investment funds The uncertainty around the results of the June vote is also impinging upon private equity funds and other alternative investment funds (such as real estate funds or renewable energy funds). In the event of Brexit, German investors may find UK funds to be less attractive, because German investment tax law treats investments in some EU funds more favourably compared to those in non-EU funds.

If the UK fund is structured as a corporate vehicle from a German tax perspective, German corporate and private investors in that fund could experience less favourable local tax treatment on the dividends and capital gains arising from their investments than if they were investing in an EU fund. This is because the German participation exemption rules would require the UK fund to be subject to UK corporate tax of at least 15 per cent on their profits, whereas EU funds would only need to be subject to regular taxation in their home country. EU funds therefore could, in practice, benefit from local tax exemptions with regard to capital income from portfolio investments.