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Brexit Q&A: Tax

12.12.2019 Tax

Huw Witty

Huw Witty Partner, Head of Tax

In this Brexit Q&A Huw Witty provides details surrounding the topic of Tax. This includes borrowing costs, anti-avoidance rules and whether there will be a tax upside from Brexit.

I have a UK holding company of my European group, how will Brexit affect me?

Once the UK leaves the EU a UK holding company will no longer benefit from the protection under the EU Parent Subsidiary Directive from withholding tax on dividends paid to it by its EU subsidiaries. You may be entitled to exemption from or reduced rates of withholding tax may suffer under a double tax treaty made between the UK and the country in which the subsidiary is resident. Treaty relief will not eliminate withholding tax in all cases. Most notably withholding tax may apply to dividends paid to a UK company by its German subsidiary. In these circumstances you should consider re-organising your group to minimise your exposure to withholding tax.

Could Brexit increase my borrowing costs?

It may do. The Interest and Royalties Directive will cease to apply to interest payments between associated companies. This may result in withholding tax applying to interest payments. Other reliefs (such as relief under a double tax treaty) may alleviate the problem although you will need to apply for these reliefs. The cost of withholding tax is normally passed to the borrower under the terms of any loan documentation. You should check a) if you will be required to withhold tax on interest payable by you, b) what affect this will have on the amount you are require to pay under a loan and c) whether this can be mitigated, for example, by re-financing.

Could Brexit result in anti-avoidance rules being strengthened?

In theory yes. A number of UK anti-avoidance rules including the controlled foreign company and the transfer of assets abroad regimes have been relaxed to comply with EU law. When the UK leaves the EU the UK government will be able to strengthen these rules again although whether this will happen will depend on the whether the government of the day wants to be seen as taxpayer friendly or not.

Could there be a tax upside from Brexit?

Again this will depend on the UK government at the time. A number of EU based tax avoidance rules (including rules relating to disclosure of cross border transactions) are currently being implemented despite the fact that the stated position of the UK government is to leave the EU. However, the EU has limited some favourable tax regimes designed to encourage investment such as the Enterprise Investment Scheme and the Enterprise Management Incentive Scheme the scope of which could be expanded if the UK leaves the EU. Also, the UK government would be free to reduce corporation tax with a view to stimulating investment after Brexit.



Article authors:

Huw Witty