Tax implications of Brexit

July 2016

A special contribution by: Guido van Asperen

The decision of UK voters to leave the European Union gives rise to many uncertainties, which may remain for some years. If the EU leadership manages to keep every remaining country ‘on board’, it is anticipated that the largest risks and economic disruption will be in the UK.

After the formal notification of the UK government to withdraw from the EU, the EU and the UK have two years to negotiate the terms and conditions of this exit. Although these two years negotiating period can be extended, this is not anticipated since it requires the cooperation of all remaining EU member countries.

What will happen with EU tax benefits?
All EU tax benefits and freedoms will be available for the UK until the final exit. Although it is difficult to predict the future, the tax incentives and measures that facilitate entrepreneurs within the European Union will for a large part disappear, including:

  • the typical EU freedom of establishment, freedom of movement of people etc.;
  • the favourable Parent-Subsidiary Directive and Interest and Royalty directives that are in place to reduce (withholding) taxes on income, dividends, royalties and interest;
  • the Merger Directive to prevent taxation upon reorganization or mergers;
  • VAT Directive and Custom Directive providing a clear framework to businesses and preventing custom duties for transactions between businesses established in EU member states;
  • social security agreements reducing the risk of the levy of social security in various countries and entitle cross border workers to (state) pension schemes in their ‘working’ countries;
  • the Arbitration Convention that facilitates the resolution of tax disputes between countries.

How will this impact businesses?
When the UK leaves the EU, doing business with the UK will become more complicated. VAT treatment of transactions may be more cumbersome and goods transactions will involve custom clearance now goods are transferred across the EU border.

But also sending persons on work assignments to the UK or employing people with a UK passport within the EU might become more difficult and more expensive in the absence of rules regarding the free movement of persons and clearly defined social security regulations for cross-border workers.

Furthermore, the exit from the EU will have a negative impact for the UK as possible location for (European) headquarters of multinational companies. The tax treatment of such headquarter is an important factor when considering its location. Hereby not only the local tax treatment is of relevance (the UK will be able to determine that itself and may volunteer to keep the favourable tax rules now imposed by EU Directives) but also the tax treatment in the countries where the ‘overseas’ subsidiaries are located play a role.

Will the bilateral tax treaties, concluded by the UK, provide for a solution?
The bilateral tax treaties that have been concluded between the UK and the various EU member states may provide some mitigation of the loss of EU tax incentives. These bilateral tax treaties do not provide the same benefits, however, in particular in relation to dealings between affiliated parties.

Sailing under the EU flag, UK holding companies now benefit from 0% withholding tax on dividends received from their European subsidiaries. When outside the EU, this benefit is only available if the bilateral tax treaty also provides for this exemption. Many treaties that the UK concluded with other EU countries do not include such withholding tax exemption for dividends payable to a UK parent company. Such exemption lacks, for example, in the tax treaties with the Czech Republic, Germany, Italy, France, Luxembourg as well as several other countries. This means that the UK will be a far less attractive location for holding companies. It will simply increase the tax bill for the multinational. 

Furthermore, using UK legal entities or UK branches as portal of entry to enter the European markets, will become less attractive.

It is difficult to predict whether the UK will be able negotiating a ‘partial’ continuation of certain EU benefits. Norway and for instance Switzerland have been able to achieve a closer ‘working relationship’ with the EU, but this took years/decades and the sentiment of the other EU countries is not likely to allow the UK to keep the benefits of the union without making contributions to it. The first reaction is that the UK cannot have their cake and eat it too.

It will take ample time before the dust settles and for the foreseeable future the uncertainties will prevent companies to make long-term commitments to the UK.

Richter would like to acknowledge the development of this piece by Richter Global colleague and fellow member of the Corporate Tax Alliance, Guido van Asperen, of Fisconti Tax Consulting, based in the Netherlands.

For further questions on this, and other issues arising from the Brexit vote, contact one of our professionals today.

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