The UK is set to leave the EU on 29 March 2019. In addition to immigration, customs duty and VAT implications, existing international corporate structures containing a mixture of UK and EU established companies will be affected.
EU Directives are currently helpful for eliminating withholding taxes on payments between associated companies in different Member States (especially when it is not possible to rely on a double taxation agreement to achieve the same result). However, on Brexit, application of the Directives will cease unless agreement is reached between the UK and the EU 27 remaining states for their continued effect. Broadly, the Parent-Subsidiary Directive (Council Directive 2011/96/EU) and the Interest and Royalties Directive (Council Directive 2003/49/EU) operate to eliminate withholding taxes on dividends and interest/royalties respectively.
It is not all bad news as we will switch our attention to UK’s double tax treaty network (which is, coincidently, the world’s largest network) as an alternative to Directives. Frequently withholding taxes will be eliminated by the application of such a treaty. Also, sometimes domestic law will mean that no withholding taxes apply in any event – for example, Cyprus and Hungary generally impose no withholding taxes on dividends, interest and royalties whilst the Netherlands, Luxemburg and Sweden have no withholding taxes on interest and royalties. On the other hand, outbound dividends from the UK should not be seen as an issue because under UK domestic law there is no dividend withholding tax (apart from real estate investment trusts).
In some situations where a UK company acts as holding company for subsidiaries located in certain EU jurisdictions (such as Germany and Italy) dividend withholding taxes will not be entirely eliminated by the relevant double tax treaty and a residual 5% withholding tax will apply. Where a UK company pays interest to a Cypriot parent company then a 10% interest withholding tax will still apply. Corporate groups impacted by Brexit implications such as these could consider restructuring so as to avoid any issues. For example:
- A dividend withholding tax charge could potentially be eliminated by introducing a new layer into an existing structure – possibly using a Cypriot or Hungarian company between a German subsidiary and an ultimate UK parent. Note, however, that BEPS Action 6 may defeat this type of planning in some jurisdictions. Treaty shopping and ‘principal purpose test’, substance issues and the general approach of some jurisdictions’ tax authorities all need to be considered.
- International corporate structures will still work provided that substance can be demonstrated, there is a clear rationale for the existence of a company and it is not a disguised tax avoidance strategy. Any structure should also be commercial and driven by business factors.
Edwin Coe LLP is a Limited Liability Partnership, registered in England & Wales (No.OC326366). The Firm is authorised and regulated by the Solicitors Regulation Authority. A list of members of the LLP is available for inspection at our registered office address: 2 Stone Buildings, Lincoln’s Inn, London, WC2A 3TH. “Partner” denotes a member of the LLP or an employee or consultant with the equivalent standing.