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BREXIT: Effects from 1 February 2020

BREXIT: Effects from 1 February 2020

Almost four years after the referendum on Britain's exit from the European Union (EU), it finally left the EU on 1 February 2020, at 1.00 AM (Romanian time). As the withdrawal agreement between the United Kingdom and the EU was ratified by the European Parliament on 29 January 2020, there will be a transition period until 31 December 2020, during which European Union laws will continue to apply in the United Kingdom. Definitive agreements will be negotiated between the United Kingdom and the EU during this period. Negotiations with the EU are set to begin in March 2020 and from 1 January 2021, the UK will be treated as a third country.

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Rene Schob

Partner, Head of Tax & Legal

KPMG in Romania

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After several postponements of the UK's exit date from the European Union, it eventually left the EU on 1 February  2020 at 1.00 AM (Romanian time).

An agreement was finally approved by both parties and ratified by the European Parliament on 29 January 2020, and thus there will be a transition period of 11 months, during which the UK will have to to apply EU law and the treaties concluded by it, but will be able to negotiate other definitive agreements. 

Discussions on the relationship between the EU and the UK after the end of the transition period will start on 3 March 2020. The EU’s position in these negotiations is due to be adopted in February. According to the withdrawal agreement, if a free trade agreement is not concluded by the end of the transition period, the UK may request an extension of this period by 12 or 24 months. However any extension must be agreed by the UK and the EU by 1 July  2020. If a free trade agreement is finalized before 31 December 2020, the transition period may also be shortened. 

During the transition period, the United Kingdom will be required to apply European Union law. Thus, there will be no major changes in the following areas:

  • Immigration - The right of EU and UK citizens to free movement, work, and residence in the UK and EU will continue to apply until 31 December 2020. The position after the end of the transition period will be discussed as part of the negotiations on the future relationship between the UK and the EU.
  • Recognition of professional studies and qualifications - All professional qualifications obtained or in progress, before the end of the transition period will be recognized by both parties.
  • Social security for migrant workers - The provisions of European regulations on the application of the principles of coordination of social security systems will continue to apply until 31 December 2020.

    Special attention should be paid to A1 forms whose validity goes beyond the end of the transition period, since after this date double taxation may apply, depending on the arrangements made following future negotiations between the European Union and the United Kingdom.
  • Customs duties -  During the transition period, the United Kingdom will continue to be part of the customs union, and thus no customs duties will be levied on trade and no checks will be made on goods imported / exported from / into the United Kingdom.

    After the transition period, in the absence of a definitive agreement, trade relations with the United Kingdom will be governed by the general rules of the World Trade Organization, without applying preferential rates. Thus, purchase of goods from the United Kingdom will no longer be treated as intra-Community purchases of goods, but as imports for which customs formalities will have to be carried out and, depending on the tariff classification and origin of the goods, duties will be levied at the time of import.
  • VAT – During the transition period, Council Directive 2006/112 / EC on the common system of value added tax, applies to goods shipped or transported from the United Kingdom to an EU Member State and vice versa, provided that the consignment or transport begins before the end of the transition period. After the transition period, delivery of goods from Romania and other EU countries to the United Kingdom will be considered exports (which are exempt from VAT, if the conditions of the Fiscal Code are met), and purchases will be considered imports (for which, as a general rule, VAT is paid at the time of import).
  • Non-residents’ income tax – During the transition period, the provisions of Directive 2011/96 / EU on the Common Tax Regime for parent companies and their subsidiaries in the Member States will continue to apply, as well as Directive 2003/49 / EC on the common tax system, applicable to interest and royalty payments between associate companies from different Member States of the European Union. Thus payments of dividends, interest and royalties made by residents of the United Kingdom / European Union states to residents of other European Union countries / United Kingdom are still exempt from withholding tax under certain holding conditions (as was the case when Britain was part of the European Union).

After the transition period, in the absence of an agreement to continue the application of the above-mentioned directives (on the model of Switzerland and of the member states of the European Economic Area (EEA)), which would ensure that the payments of dividends, interest and royalties made by residents of the UK to EU/EEA/Swiss residents and vice versa would remain exempt from non-resident income tax, these will be taxed.

© 2020 KPMG Tax SRL, a Romanian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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