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UK: Brexit tax implications, EU directives

UK: Brexit tax implications, EU directives

Following “Brexit” from the European Union on 31 January 2020, the UK has entered into a transition period until the end of 2020. Items to consider include the legal basis on which EU directives, that are relevant for corporate tax purposes, continue to apply during the Brexit transition period and what are the implications for taxpayers involved in UK/EU cross-border transactions.

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What effect will Brexit have on EU directives?

From the exit date (i.e., during the transition period) the UK will no longer play any role in the EU decision-making process. However, it will still be required to continue to apply and implement EU law that falls within scope of the withdrawal agreement. The Court of Justice of the European Union would also continue to have jurisdiction during this transition period.

Upon expiration of the transition period, from a direct tax perspective, the UK will no longer be directly covered by EU directives including: (1) the Parent-Subsidiary Directive (PSD); (2) the Interest and Royalty Directive (IRD); (3) the Merger Directive; (4) the Directive on Administrative Cooperation (DAC); (5) the Anti-Tax Avoidance Directive (ATAD); and (6) the Directive on tax dispute resolution mechanisms in the EU.

The domestic implications of some of these directives (such as the PSD and IRD) may be limited mainly due to the operation of existing UK tax law. EU-derived domestic legislation, as is effective in UK law immediately before exit day, will continue to have effect in the UK on and after exit day due to such legislation already having been transposed into UK domestic law. Moreover, UK legislation is already compliant with the PSD because the UK does not impose a withholding tax on dividends and offers an exemption from tax on foreign dividends received by parent companies.

However, none of the remaining EU Member States will be bound by the PSD in so far it relates to the UK. The treatment of interest, royalty and dividend payments from EU Member States to the UK after the transitional period will depend on the particular EU Member State’s domestic law and income tax treaty position. The UK has income tax treaties with all 27 EU Member States, but many of these treaties do not provide equivalent benefits to those available under the PSD and the IRD.

Brexit could result in a significant increased tax burden for businesses that have material investment/transaction flows with these treaty jurisdictions as some of these EU Member States may start to deduct (withhold) tax from dividends paid by EU subsidiaries to UK parent companies which used to be exempt under the PSD.


DAC6

UK legislation implementing the amended EU Directive on Administrative Cooperation (DAC6) introduces new disclosure and reporting rules for intermediaries involved in certain types of cross border tax arrangements. It has been widely expected that Brexit would not affect the UK’s domestic implementation of DAC6, irrespective of a “deal” or “no-deal” scenario.

Finance Act 2019, s84 provided that no regulations may be made unless the Chancellor of the Exchequer has presented to the House of Commons a report on how the powers in that section are to be exercised in each case when the UK leaves the EU either with, or without, a negotiated withdrawal agreement or framework for the future relationship. The HM Treasury report published on 8 January 2020 provides that if the UK leaves with a deal, then the directive would have to be implemented at least for the transitional period. However, it does reserve the right to change it later after the UK leaves (also in a “no-deal” scenario).
 

What are other countries doing?

Certain EU Member States (such as Germany and Italy) have introduced Brexit-smoothing law over the past year, intending to eliminate tax adverse consequences of the UK becoming a “third country” for their domestic tax purposes, particularly in a “no-deal” Brexit.

Germany published the Brexit Tax Accompanying Act on 21 February 2019 and had already implemented a Brexit Transitional Act, which would allow Germany to treat the UK as an EU member during the transitional period if the withdrawal agreement is accepted. This is particularly helpful for UK groups with German subsidiaries that may have faced an incremental 5% withholding tax on bringing dividends from Germany to the UK after 31 January 2019.

On 25 March 2019 Italy published a law decree providing guidance for various Italian industries and sectors in the event of a “no-deal” Brexit. The law decree provides that existing Italian law provisions—including those related to an EU directive—that are currently effective as a result of the UK’s membership in the EU with continue to apply for an 18-month transition period starting from the effective date of a “no-deal” Brexit.


Read a January 2020 report prepared by the KPMG member firm in the UK

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