Brexit – The UK and International Tax Consequences

by Dechert LLP
Contact

The political, economic and constitutional fallout of the UK’s referendum decision to leave the European Union (Brexit) will continue for some time. In addition to considering some of the possible domestic UK tax implications of Brexit, this OnPoint also considers some of the potential tax implications from the perspective of the U.S. and certain European jurisdictions. Since much will depend on the relationship the UK negotiates with the EU in the coming months and years, and the future domestic tax policy adopted by the UK government, what follows should serve only as an illustration of possible future changes. Taxpayers should closely monitor developments in this area. 

Much commentary has focused on the consequences of Brexit on the UK market and on UK taxation. However, there will undoubtedly also be material tax implications for taxpayers in other jurisdictions. In short, any exemptions from tax in other EU member states or treaty jurisdictions which rely on the UK being a member of the EU are likely to be affected. Set out below are some initial thoughts as to potential international tax issues to bear in mind.

Immediate Challenges

In brief, Brexit is unlikely to have a material, immediate impact on UK tax policy. The UK remains a full member of the EU until formal talks on secession are complete and any resulting agreed arrangements become effective. Any such agreement could take two or more years following the UK government’s formal commencement of the secession process. In addition, George Osborne, the UK Chancellor, recently stated that no post-Brexit budget will take place until the Conservative Party chooses a new Prime Minister in October 2016.

Potential U.S. Tax Consequences 

  • U.S. Tax Treaty Eligibility for European Companies

Brexit may have an effect on double tax treaty eligibility for European companies (including investment vehicles in EU member states such as Irish ICAVs). U.S. tax treaties generally require that a company claiming treaty benefits meet certain ownership requirements, often by requiring ownership by persons in the country in which the company is organised. In the case of U.S. treaties with EU members, ownership by persons in other EU member states can often satisfy this requirement for the purposes of providing certain treaty benefits (referred to as claiming “derivative benefits” under the treaty). Accordingly, when the UK is formally no longer an EU member, companies that relied on UK owners as members of the EU could lose the ability to claim derivative benefits. 

That said, even after it leaves the EU, the UK may be able to continue its membership in the European Economic Area (EEA) thereby maintaining an association with the EU like Norway, Iceland and Liechtenstein. In that case, depending on the treaty, owners who are residents of the UK would still qualify for derivative benefit status, because some treaties accord derivative benefits if the owner is a member of the EEA (including the treaties with Belgium, Bulgaria, Denmark, Finland, Germany, Iceland, Malta, Netherlands, Sweden and Switzerland).

  • The UK as a Holding Company Jurisdiction

The UK has become popular in recent years as a holding company jurisdiction, including for U.S.-based companies that have undergone “inversions”. Many of the benefits of the UK as a holding company should remain post-Brexit, such as the favorable UK domestic tax regime, the U.S.-UK tax treaty, and the non-tax benefits London has to offer. Some benefits may even be enhanced as a result of Brexit (such as greater control over its domestic corporate tax policy as explained further below). 

However, some of the benefits of the UK as a holding company jurisdiction are contained in EU law which may not apply post-Brexit. Notable Directives that could be affected by Brexit include, in particular, the Parent – Subsidiary Directive (as to which see further below) and the Interest and Royalty Directive which prohibit withholding taxes on intra group interest, dividend and royalty payments. It remains to be seen if the potential higher withholding taxes on dividends and other payments from member states of the EU may erode the advantages of the UK as a potential destination for U.S. companies seeking inversions. The inability to continue to be able to rely on such Directives could result in a UK holding company ceasing to be as tax effective as it is currently although in most cases (but not all) bilateral tax treaties may avoid withholding taxes. For example, the UK tax treaties with Germany and Italy do not eliminate dividend withholding tax. UK subsidiaries could also incur additional withholding tax on certain types of royalty or interest payments to EU parent companies or affiliates.

Potential European Tax Consequences

Many EU jurisdictions, such as Germany, provide beneficial tax rules for foreign taxpayers which are tax resident in an EU member state (such as the UK) as well as for EU taxpayers which make cross-border investments into companies tax resident in other EU member states (such as the UK). Once the UK leaves the EU, these beneficial rules will no longer apply. By way of example, and noting that similar consequences may arise in other EU jurisdictions, notable consequences may include:

  • Application of CFC-Rules

Under the controlled foreign companies rules (CFC-Rules) in other EU jurisdictions the UK could be considered to be a low tax jurisdiction because the corporate income tax rate is below 25 per cent. As a consequence, EU shareholders of UK companies that generate passive income (e.g. interest/dividends), would generally be subject to the CFC-Rules. 

However, such CFC-Rules in EU jurisdictions generally provide for exceptions on which UK companies have often relied by virtue of the UK’s EU membership which may not apply following Brexit. Consequently, investments by EU taxpayers into UK companies may become subject to the CFC-Rules in other EU jurisdictions.

  • Taxation of UK Dividends 

Based on the Parent-Subsidiary Directive, there is no withholding tax on dividend payments made to a parent company located in the EU. Brexit may deprive UK parent companies of this withholding tax exemption (unless the UK adopts an EEA model). However, double tax treaties concluded by the UK will remain applicable following Brexit and could allow UK parent companies to benefit from reduced rates of withholding taxes.

Moreover, Germany exempts dividends paid by EU subsidiaries from German Trade Tax (charged at between 7-17%, depending on the municipality). Following Brexit, the requirements for dividends paid by UK subsidiaries to a German taxpayer to be exempt from Trade Tax will become more onerous. In particular, dividends paid from UK holding companies will likely become fully subject to Trade Tax.

  • Taxation of Capital Repayments 

By virtue of the UK’s membership in the EU, repayments of capital by UK companies to German shareholders are currently not subject to tax provided certain conditions are met. After Brexit, unless the UK adopts an EEA model, such capital repayments by UK companies to German shareholders could become fully taxable for German Corporate Income and Trade Tax purposes.

  • Taxation of Cross-Border Restructurings

Based on the Merger Directive, Germany allows for income tax-neutral cross-border mergers and other restructurings of EU companies. Similarly, there is no taxation in Germany when a German company transfers its seat or effective place of management to another EU member state as long as a domestic permanent establishment remains in Germany. Further, certain restructurings involving EU companies are exempt from German Real Estate Transfer Tax. Following Brexit, these beneficial tax rules will no longer be available for UK companies unless the UK adopts an EEA model.

  • Transfer Pricing, Exit Tax and Inheritance Tax

Brexit will also have a negative impact on the Transfer Pricing rules (i.e., higher burden of proof requirements due to the fact that the Directive on Administrative Cooperation and the Arbitration Convention will cease to be applicable), the exit taxation for private individuals (i.e., the exit taxation will be triggered immediately and can no longer be deferred or, depending on the country involved, will be deferred only after provision of bank guarantees) and Inheritance Tax (i.e., shares in EU companies benefit from certain tax-allowances, which will no longer be available in relation to UK companies).

Domestic Tax Consequences

There is unlikely to be any immediate impact of the Brexit vote on UK tax policy, as the UK is still a full member of the EU until formal talks on secession are completed and any resulting agreed arrangements become effective. EU Directives implemented by statute will remain part of UK law unless changed by further UK statute. Nevertheless, it is worth noting the following.

  • Potential for Increased Flexibility of UK Tax Policy

Post-Brexit, the UK should be free to avoid some of the EU wide tax measures the UK government doesn’t like - such as the current proposals to harmonise corporation tax rules (the Common Consolidated Corporate Tax Base). In addition, it would not need to comply with the proposed Anti-Tax Avoidance Directive which includes measures which go beyond the OECD’s BEPS proposals. Unless the UK decides to continue as a member of the EEA, it would also be free to implement tax laws that constitute state aid or contradict EU freedoms or are discriminatory against EU companies. This could lead to an even more competitive tax regime.

  • VAT 

VAT has been harmonised in the EU since 1977. If the UK leaves the EU it would be free to change how VAT is charged or implement a different or additional turnover tax. However, VAT is a big revenue raiser and so it seems unlikely that wholesale changes would emerge in the near to medium term. 

  • Customs Duties

Changes could arise to Customs Duties. It seems likely that the UK would leave the customs union given that one of the key benefits of Brexit is perceived to be the ability to negotiate new free trade agreements. As a result exports between the UK and the EU may need to go through custom procedures and significant changes to rates of duty may arise.

  • Stamp Duty

The UK’s stamp duties should not be directly affected by Brexit but since the Capital Duties Directive may no longer apply, it is possible that stamp duty could be reinstated in relation to new share issues.

Next Steps

The outcome of the UK referendum does not require an immediate reaction from a tax perspective. However, as the UK’s withdrawal from the EU progresses, and while an element of uncertainty remains regarding future tax policy, taxpayers should remain cognisant of the direction of travel and should take into account the possible significant changes on the horizon when undertaking transactions and implementing their tax strategies.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dechert LLP | Attorney Advertising

Written by:

Dechert LLP
Contact
more
less

Dechert LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.