Brexit… one word that has a big impact. The ripple effects of Brexit reach far and wide, leaving its mark on political, economic and diplomatic issues as well as on various aspects of tax.
Christophe Diricks: Since January 2021, the United Kingdom is a third country to the European Union, no longer covered by the EU laws and regulations. The main corporate direct tax consequences are:
- Inbound dividends from UK companies and outbound dividends paid to UK companies can be tax exempt only if one can demonstrate that the UK company is taxable like a Luxembourg company. The so called “comparable tax test” should be met in most of the cases with some exceptions for shipping business,
- Royalties flows will now suffer 5% UK WHT but tax credit will be available to reduce the tax burden.
- For DAC 6, or the so-called “mandatory disclosures rules”, the UK will enforce very limited DAC6 rules, as only hallmark D will be applicable. Therefore, the Luxembourg tax authorities have indicated that a UK DAC6 reporting cannot be relied on for Luxembourg reporting purposes. It also means that a Luxembourg permanent establishment of a UK intermediary may have reporting obligations in Luxembourg.
What about VAT Quentin?
Quentin Warscotte: Brexit also has VAT consequences – not only for goods but also for supplies of services:
- First, there is an extension of the input VAT deduction right for financial services rendered to UK customers by Luxembourg suppliers, and then
- Services provided to UK non-taxable persons should not be charged with Luxembourg VAT – as it was the case prior to 31st December 2020
Christophe Diricks: Thank you very much Quentin! Sophie, we have seen many asset managers and Insurers relocating their Manco or headquarters in Luxembourg, what are the transfer pricing consequences, in a few words?
Sophie Boulanger: Absolutely Chris, the key point is not to rely on the former TP policy because the functionality of the Luxembourg head office or company is usually very different from the UK one:
- On one side, the insurers are usually not all underwriting from Luxembourg while they performed that significant function in the UK
- On the other side, the management companies tend to delegate investment advisory or portfolio management back to the UK and retain less functions in Luxembourg. It is very important to adapt the former TP policy to the new reality and to properly document it
Christophe Diricks: Thanks Sophie! Last but not least, free movement of workers. Xavier, I think there are some changes for social security and immigration?
Xavier Martinez: You are right Chris, two sets of rules will be running in parallel, as the old European rules should still apply to cross-border situations initiated before 1 January 2021. For situations falling into the new EU-UK agreement:
- Determination of applicable social security is quite similar to the EU regulation approach, except that there is no flexibility to extend the posting of employees beyond 24 month
- Immigration formalities will increase, notably the visa requirement if the individual stays over 3 months in Luxembourg
Christophe Diricks: Thanks to all of you. We will have to monitor very closely the status of the UK with the forthcoming changes in their tax system, especially if the UK wants to become the Singapore on Thames…
Our team of tax experts is at your disposal to help you navigate in these turbulent waters.
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What is the Brexit impact?