On 23 June 2016 the UK population voted for the UK's exit from the European Union (EU). The applicable exit procedure and certain possible tax consequences of Brexit will be discussed below.

In the short term, we do not identify material changes for the legal practice. The European law and regulations will remain in force until the negotiations between the EU and the UK have been completed and the withdrawal procedure has come to an end. To which extent European law and regulations will also apply following the UK's exit from the EU, will largely depend on the outcome of the negotiations. One of the fundamentals of the EU is the internal market, allowing for the free movement of goods, services, workers and capital (Internal Market). In this context we note that in January 2017, Prime Minister May announced that the UK will opt for a "hard Brexit", meaning that the UK will no longer maintain membership of the Internal Market, nor accede to any associated status. Instead, the UK will seek a free-trade deal with the EU outside the Internal Market.

Brexit background

Since 2007 (Treaty of Lisbon), the EU Treaty offers a Member State an explicit legal basis to leave the EU (Article 50 TEU). Pursuant to Article 50(2) TEU, the UK can start the exit procedure by giving notice to the European Council. The exit agreement will be concluded on behalf of the EU by the Council1, acting upon a qualified majority2 and after having obtained the consent of the European Parliament. The agreement must set out the arrangements for the UK's exit and take account of the framework for the UK's future relationship with the EU. The UK cannot participate in the relevant discussions or decisions of the European Council or Council.

The EU Treaties cease to apply to the UK from the date of entry into force of the exit agreement or, if there is no such agreement, 2 years after the date of notice under Article 50 TEU, unless the European Council, in agreement with the UK, unanimously decides to extend this period. The exit procedure has never been called for and the way forward is full of uncertainties. Apart from Article 50 TEU, no further provisions or guidelines apply.

What types of tax are coordinated at EU level?

The EU coordinates and harmonises multiple fields of taxation, including corporate income tax, withholding tax, capital tax and, in particular, VAT & Customs regulations. In addition, EU freedoms and case law of the European Court of Justice (ECJ) have had a significant impact on domestic tax rules. This note mainly deals with the potential consequences of Brexit on corporate income tax and withholding tax. We have described the potential impact of Brexit on VAT & Customs regulations in a separate note.

EU Parent-Subsidiary Directive

The EU Parent-Subsidiary Directive (EU PSD) provides for two benefits. Firstly, the EU PSD abolishes withholding tax on dividend distributions to EU parent companies owning 10% or more in qualifying EU subsidiaries. Secondly, the Member State of the parent company is obliged to provide for double taxation relief in the form of an exemption (of at least 95%) or a tax credit for profit distributions received from such an EU subsidiary for levying corporate income tax.

In this respect, Brexit may affect UK parent companies investing in EU subsidiaries, as a consequence of which UK parent companies might have to rely on tax treaties to reduce withholding tax on dividends. Currently, the UK does not levy withholding tax on dividends, therefore EU parent companies of UK subsidiaries should not be affected insofar as withholding tax is involved. The respective tax treaties between the UK and Belgium, Luxembourg, the Netherlands and Switzerland may, however, safeguard withholding tax exemptions for dividends on profit distributions made by companies resident in said countries to their UK parent companies. To this extent, the impact of Brexit will probably be limited.

The parent company's country of residence may no longer be obliged to provide for relief in the form of an exemption or tax credit for corporate income tax purposes. However, the participation exemption or reduction regimes in Belgium, Luxembourg, the Netherlands and Switzerland do not (only) rely on the EU/EEA residency of the subsidiary. As such, the adverse impact of Brexit for holding companies with UK subsidiaries in the BeNeLux and Switzerland will probably be limited as well.

EU Interest and Royalty Directive

The EU Interest and Royalty Directive abolishes withholding tax on interest and royalty payments made between associated EU-resident companies (i.e. companies with a 25% direct ownership link or through a common parent entity). Because the UK levies 20% withholding tax on both interest and royalties, Brexit may certainly affect intra-group financing and licensing arrangements. Treaty protection with regard to tax mitigates this issue only to a certain extent. For example, the Belgium-UK tax treaty allows 10% withholding tax on interest, whereas the Luxembourg-UK tax treaty allows 5% withholding tax on royalties.

EU Tax Merger Directive

The EU Tax Merger Directive provides for the possibility of tax-neutral, cross-border mergers within the EU. This rollover facility may no longer be available for EU companies that merge with a UK company after Brexit. Hence Brexit may hinder cross-border restructurings.

EU Anti-Tax Avoidance Directive

In the same week as the Brexit vote, the EU Council reached political agreement on the EU Anti-Tax Avoidance Directive (ATAD), which is essentially implementation by the EU of part of the OECD BEPS project. Following Brexit, the UK will no longer have to implement the ATAD. The UK however intends to implement unilateral anti-tax avoidance rules by itself, which arguably have a broader scope in some instances than the ATAD provisions.

Further harmonisation: CCCTB

The next level in EU harmonisation of corporate income tax, the Common Consolidated Corporate Tax Base (CCCTB), has recently been tabled again by the European Commission. With the UK leaving the EU, the changes being made to the CCCTB that will become reality arguably increase as the UK has always been one of its main opponents.


Alongside the ATAD developments, the EU has been working on increasing transparency on tax matters, including the exchange tax rulings between EU Member States and (publicly available) country-by-country reporting. The UK would be excluded from these obligations, although following the implementation of the OECD Common Reporting Standards in 2017, comparable information has to be disclosed anyhow.

Impact on domestic legislation

Many domestic tax laws of the BeNeLux apply in a similar way to resident companies as well as to companies resident in another EU/EEA jurisdiction in order to comply with EU freedoms and ECJ case law. In this respect, parent-subsidiary and fiscal unity regimes, roll-over facilities for corporate restructurings and dividend tax exemptions or refunds for EU pension funds, for example, may come under examination. The application of such rules to UK resident companies may differ after Brexit.

Impact on the application of the tax treaty

Despite treaties for the avoidance of double taxation that generally apply on a bilateral basis between two countries, Brexit may nevertheless impact the application of some aspects thereof. For instance, the definition of `equivalent beneficiary' - which is part of the `limitation on benefits test' in many tax treaties that Member States have concluded with the US - includes EU/EEA resident beneficiaries. Brexit may therefore impact EU (i.e. non-UK) companies that currently rely on their UK beneficiaries to benefit from tax treaty relief in relation to the US.

What next?

Once the UK invokes Article 50 TEU, the UK and the EU will negotiate the terms of Brexit. It will be a highly political process and the outcome is as yet unclear. Therefore it is of the utmost importance to monitor the developments and the potential impact on your company's tax position closely. We will keep you informed about further developments.