Tag Archives: Withholding Tax

Possible Tax Impact of a No Deal Brexit on Groups

Group structuring

Some EU countries’ domestic legislation provides specific reliefs if the counter-party is in the EU. These reliefs may have been relied upon for past transactions and reorganisations. As the UK may no longer be classed as an EU counter-party this may result in clawback of a relief which has been relied upon. Sticking to this theme, there may well have been migration involving the UK which has relied on tax deferrals under the EU freedom of movement. The UK’s departure from Europe may put the availability of those deferrals at risk and generate unforeseen tax liabilities.

At a more esoteric level the existence of a UK subsidiary, which is no longer within the EU, within a European group may adversely affect treaty benefit claims under double tax treaties involving EU countries and the US. The reliance on such treaties and the consequence of the UK’s departure from the EU should be considered.

Group cash flows

At a more basic level dividend, interest and royalty flows may rely on the EU Parent Subsidiary Directive or the Interest and Royalty Directive to prevent the application of withholding taxes. With the UK leaving the EU the ability to apply the terms of these directives would be at risk.

Without the benefit of the directive it would be necessary to consider the double tax treaty which the UK has negotiated with the counter jurisdiction to determine the extent to which there is a reduced rate of withholding tax provided under the treaty. This is particularly of concern if debt has been obtained from elsewhere in the EU and the terms of the loans include a gross up clause for interest. If the treaty reduces the domestic rate of withholding tax then the process to obtain treaty benefit would have to be followed. There are varying processes and varying time frames required to access treaty benefits.

Election to tax the overseas dividend

A solution which is relevant for dividends received in the UK is the election to tax the dividend received from overseas. This might be beneficial as a small number of treaties require dividends to be taxed in the UK in order to qualify for reduced rates of withholding tax. Mathematical modelling could be undertaken to determine if it is more advantageous to pay 19%/17% on dividend income and have a reduced withholding tax or have the dividend exempt from UK tax but suffer the foreign withholding tax.

The above are a flavour of the myriad of direct tax consequences of a No Deal Brexit and show that there is no one size fits all solution for business. Each business should review its structure, past transactions and internal fund flows in order to determine the cost versus the benefit of No Deal planning.

Is your UK holding company Brexit proof?

UK holding company with EU subsidiaries?

A very common scenario we see is a UK holding company with subsidiaries scattered across the EU. In this scenario, profits may be paid up by the subsidiaries to the holding company by way of dividend, usually free of withholding tax under EU directives. A similar situation currently exists for certain interest and royalty payments.

The threat of withholding tax after Brexit

However, in under a year, the UK will have left the EU. Exactly what arrangements will be in place after we have left are still unknown. But, once we have left, it may well be the case that dividends paid up from EU subsidiaries to a UK holding company may well be subject to withholding tax, (depending on terms of any Double Tax Treaty between the countries concerned). Likewise, maybe, with interest payments, royalty payments, rents and certain other payments.

Review Double Tax Treaties with the countries where you have subsidiaries

Given the high rates of withholding taxes, UK holding companies should review Double Tax Treaties with those countries where subsidiaries are located to consider the potential cost impact of Withholding Taxes being levied. It may be appropriate to consider restructuring operations.

Initial thoughts on Taxation after Brexit

Indirect Tax

The UK is part of the EU Customs Union and therefore goods can be moved to and from other member states without duties (either customs duties or import VAT). There are reduced compliance obligations on intra-EU transfers.

Unless the UK negotiates otherwise then goods brought into the UK from the EU will be subject to import VAT and import duty. Conversely goods exported out of the UK and into the EU will be subject to EU import VAT/duty.

The EU has negotiated favourable terms of export to third countries and the UK may lose the benefit of these rights. However the UK will no longer be bound to EU rates and tariffs and therefore may be able to reduce costs of importation or negotiate separate (even more favourable) terms of exports to third country.

The rate of VAT in the UK is controlled by Brussels. On leaving the EU these restrictions will be lost and therefore the standard rate of VAT may change and/or the items to which the zero rate applies extended.

At present there is a process allowing the UK to recover VAT incurred in other EU countries. This involves access to a single portal on the HMRC website. Although recovery will still be possible after Brexit the administrative process is likely to change and therefore there may be delays in future recovery of EU VAT.

Direct Tax

Direct taxes are broadly determined by member states without direction from Brussels and therefore there should be little impact on direct tax rates. Irrespective of this independence there are UK rules which have been specifically designed to be compatible with EU law and EU freedoms. Those rules can be repealed or varied.

Some tax reliefs are subject to EU state aid considerations and cannot be implemented without EU approval. Theoretically those reliefs could be expanded considerably. However the UK will remain a member of the OECD and therefore subject to OECD harmful tax practice considerations. These considerations are likely to restrict the introduction of very generous tax reliefs.

Withholding Taxes

There are exemptions from domestic withholding taxes for payments to EU members. After Brexit those exemptions would not necessarily continue and the rate of withholding tax would be determined by the tax treaty between the UK and its European neighbours. In the absence of any other agreements this would suggest an increase in withholding taxes on both inbound and outbound payments. Arrangements with gross up clauses (i.e. the recipient receives a certain sum and any withholding tax is a cost to the payer) would need to be managed carefully.

The UK does not have any outbound dividend withholding tax and therefore dividend payments out of the UK would remain unaffected.

Social Security

There are specific rules which apply to EU residents who work in another member state. They are designed to restrict the social security contribution to one state and determine which state that is. These rules may not apply after Brexit and this could lead to double taxation for some internationally mobile workers.

Timings for change

Any changes are not likely to be immediate. I would anticipate that Budget 2018 would prepare the country for any changes in our domestic taxation.

The reality is that no-one really knows the taxation impact of Brexit and the extent that some, or all, of the above occur can only be determined with the fullness of time.