Brexit Impact on Direct Tax

CURRENT SITUATION

Although UK direct tax is a matter for the UK, it has been shaped over the years by the four fundamental freedoms enshrined in the EU Treaty – freedom of establishment, free movement of capital, free movement of workers and free movement of goods.

As a member of the European Union (EU) the UK’s direct tax was covered by several EU directives. In the event of a no-deal Brexit, EU directives would cease to apply at the end of the implementation period on 31 December 2020.

WITHHOLDING TAXES

Currently WHT is typically eliminated on payments between two EU member states as result of the following EU directives:

• Parent / Subsidiary Directive: eliminates WHT on dividend payments between associated EU companies
• Interest and Royalties Directive: which exempts from WHT most payments of interest and royalties between associated EU companies where the recipient is the beneficial owner of the income.

These directives have been incorporated into the UK tax legislation. Therefore, in the event of a no-deal Brexit, these rules should continue to apply on payments to associate companies in other EU Member States.

However, this may not be reciprocated by other Member States. Although UK businesses could rely on the particular Member State’s domestic tax rules and tax treaties between UK and individual Member States, they may not offer the same level of relief as under the directives.

Brexit could result in an increased tax burden for UK businesses with investment in and transaction with these treaty jurisdictions as some EU Member States may start to withhold tax from payments made for example by EU subsidiaries to its UK parent companies which exempt under the Parent / Subsidiary Directive.

Further, when UK leaves the EU, State Aid rules and Code of Conduct rules on business tax relating to harmful tax practices will cease to apply. As a Member State, UK was required to obtain EU State Aid approval for various reliefs like EIS, EMI and R&D reliefs. This may continue to be the case if an agreement between the UK and the EU is to be reached to maintain a “level playing field”.

Even though the shape and structure of the UK’s exit from the EU remains unclear, UK businesses should start to consider the direct tax consequences of Brexit now, so they have time to put in place any necessary changes.

Action Points to Consider:

• Review any arrangements that currently place reliance on EU directives rather than the terms of a double tax treaty (“DTT”)
• Review the terms of the DTT and ensure relevant documentation is prepared where a formal claim is required in the EU jurisdiction
• Speak to your Ecovis tax adviser to review all cross border transactions

  
Here to Help
To help businesses prepare for Brexit, we have produced some useful materials including: • Preparing for Brexit: A Guide for Businesses (including helpful links to tools and further resources); and  • A 15-point Action Plan.

 If you would like a copy of the guide or the 15-point Action Plan, please complete the form below.