BREXIT AND THE LOSS OF EU DIRECT TAX DIRECTIVES

The following article was published by Richard on LinkedIn on 30 June:

Many commentators have looked at the VAT and Customs impact of a BREXIT, but there would also be direct tax implications.

Assuming two variables

- The UK will actually leave the European Union following the referendum
- No agreement will be reached on EU tax directives continuing to apply post-BREXIT

then the EU Parent/Subsidiary Directive and the Interest and Royalties Directive will cease to apply on exit.

Above all this will impact upon multi-national groups headquartered in the UK and could make the UK a far less attractive holding company location.

DIVIDENDS

At the moment dividends paid to a UK resident company by an associated company in another EU Member State (or Switzerland) are usually exempt from withholding tax in the paying State.

Although the UK has a broad network of double taxation avoidance agreements which in most cases should reduce or eliminate dividend withholding tax, this is not always the case.

For example, dividends paid by a wholly owned Hungarian subsidiary to its UK parent company could currently be paid without withholding tax using the Parent/Subsidiary Directive. However, on BREXIT such dividends will be liable to withholding tax of 10%.

It should be noted that the UK itself does not impose withholding taxes on outbound dividends under domestic legislation and this is unlikely to change.

INTEREST & ROYALTIES

Similarly interest and royalties are usually exempt from withholding tax in the paying State.

Double taxation avoidance agreements reduce or eliminate interest and royalty withholding tax, but the result is not always advantageous.

For example, interest and royalties paid by a wholly owned Maltese subsidiary to its UK parent company can currently be paid without withholding tax using the Interest & Royalties Directive. However, on BREXIT such payments will be liable to Maltese withholding tax of 10%.

The UK applies a 20% withholding tax to outward payments of interest and to some types of royalty. This rate is often reduced under a double taxation avoidance agreement. For example, when a UK subsidiary pays interest to its Cypriot parent company it will have to deduct withholding tax at a rate of 10%

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