The UK now has an extended deadline of 31 January 2020 to achieve Brexit as the country enters a 6 week period of campaigning in the run up to a General Election on 12 December 2019. Business should review how Brexit will impact them and in this update we consider the direct tax implications for companies.
The three areas we will consider are EU Directives, EU State Aid and UK Companies in International Structures.
Three main directives issued by the EU have a bearing upon UK direct taxes. These are the Parent & Subsidiary Directive; and the Interest & Royalties Directive; and Mergers Directive.
The Parent & Subsidiary Directive operates so as to prevent withholding taxes on dividends between EU companies where there is significant participation. Upon leaving the EU this could mean that UK companies find withholding taxes being applied on dividends received. Of course, we do still have tax treaties with each country which could limit this effect. Due to the uncertain landscape, groups should urgently consider whether there is a case for accelerating dividends from their EU subsidiaries.
The Interest & Royalties Directive similarly prevents withholding taxes on payments between EU companies. As with dividends we would therefore need to revert back to tax treaty rates with the individual countries and groups should urgently consider whether there is a case for accelerating royalties and/or interest payments.
The Mergers Directive essentially works so as to ensure cross border mergers within the EU are offered the same tax breaks as wholly UK mergers. This of course seems perfectly sensible in the context of the EU model and therefore the UK did legislate to comply with the directive However with the UK ceasing to be a member state of the EU, the domestic legislation would not provide protection for UK companies. Therefore, any group presently undergoing restructuring or merger transactions and expecting to benefit from this Directive should urgently review their position.
Whilst the loss of application of EU Directives could mean a potential tax increase for UK companies, there could be some better news from the UK no longer being bound by EU rules on State Aid limitation. In particular, the UK government could potentially make the following tax reliefs more generous:
• Research & Development Tax Credits (R&D)
• Enterprise Investment Scheme (EIS) relief
• Enterprise Management Incentive (EMI) share options
• Venture Capital Trust (VCT) relief.
UK Companies in International Structures
Notwithstanding Brexit, the UK remains a very tax effective holding company regime, with key exemptions for certain gains realised and dividends received.
Coupled with a main rate reducing to 17%, exemptions for overseas branch profits, and no withholding tax on dividends paid, the UK continues to be competitive in attracting international groups.
In the meantime, if you would like to discuss the potential implications for your own business, please get in touch with your usual Campbell Dallas contact.
The information in this blog should not be regarded as financial advice. This is based on our understanding in November 2019. Laws and tax rules may change in the future.