The UK will no longer be required to give effect to a number of specific EU Directives, including the Parent/Subsidiary Directive, the Interest and Royalties Directive, the Mergers Directive, the Capital Duties Directive and the Mutual Assistance Directives. Following Brexit, the UK will no longer be an EU Member State for the purposes of applying such Directives, leading to potential immediate detrimental impact on the payments and transactions affected by these Directives made to UK companies.
In this context, it is worth noting that half of all European headquarters of non-EU firms are in the UK, with the UK hosting more HQs than Germany, France, Switzerland and the Netherlands put together (Global Counsel, “BREXIT: the impact on the UK and the EU”, June 2015). Whilst in some cases equivalent bilateral agreements exist, in the absence of such equivalent bilateral agreements, the UK will no longer be such an attractive option for a European HoldCo, if the HoldCo cannot receive dividends, royalties and interest without suffering overseas taxes.
The Parent/Subsidiary Directive abolishes withholding taxes on the payments of dividends between associated companies in different Member States and the double taxation of parent companies on their subsidiaries’ profits. Brexit will potentially affect dividends from companies based in other EU Member States to their UK parent company, as the UK parent company will no longer benefit from the Directive. The actual impact will differ from jurisdiction to jurisdiction depending on the terms of bilateral tax treaties entered into by the UK. However, dividends from UK companies to parent companies in other Member States will not be affected as the UK does not generally impose withholding taxes on dividend payments.
Brexit will, in principle, remove the benefit of the Interest and Royalties Directive, meaning that payments of royalties and interest to a UK company from an associated company in an EU Member State may be subject to withholding taxes
Again, the impact will differ from jurisdiction to jurisdiction based on the terms of any bilateral double tax treaty. Equally, UK withholding tax of 20% may become applicable to royalty and interest payments made by UK companies to associated companies based in the EU, depending on the terms of any double tax treaty.
The UK will no longer be obliged to comply with the Merger Directive. The Merger Directive is intended to remove fiscal obstacles to cross-border reorganisations. For example, where a company transfers assets or liabilities to a company in another EU Member State under a merger, taxation of the difference between the real value and the value of those assets or liabilities for tax purposes can be deferred. UK companies involved in a cross-border merger may no longer benefit from the application of the Mergers Directive by EU Member States, however. This may have a detrimental impact on any post-Brexit restructuring of businesses. See our article, “Brexit: tax issues on business restructurings”.
Although the UK does not levy any capital duty, the restrictions contained in the Capital Duties Directive have impacted the UK’s ability to levy SDRT on certain transfers of shares, including the transfer of shares into clearing systems; these restrictions would no longer apply following Brexit.
The close involvement of the UK in the current EU approach to tax transparency and the common implementation of BEPS, suggests that, although the Directive on Administrative Cooperation in Taxation (DAC) will, in principle, cease to apply following Brexit, this may have limited practical effect. The UK is committed to greater tax transparency, including the Common Reporting Standard (CRS) and Country by Country Reporting, and it is highly likely that the UK will implement the same information exchange and tax transparency regimes as those in the EU. However, there might be more flexibility for the UK post-Brexit, in that it could simply implement the CRS on its own terms rather than having to adopt the EU amended DAC, which goldplates certain aspects of the CRS.
In addition, the UK supports the Organisation for Economics Co-operation and Development's (OECD) Base Erosion and Profit Shifting (BEPS) project and is likely to implement its recommendations whether as part of a wider EU implementation or otherwise. However, on a practical level, Brexit will mean that the UK will most likely require more domestic and bilateral agreements to apply mutual assistance measures between the UK and EU Member States. For example, the UK may no longer benefit from the exchange of tax rulings proposals, which could limit the UK’s ability to get information on/challenge international structures in the absence of equivalent bi-lateral measures.
As such, the UK’s double taxation agreements may become increasingly significant following Brexit given that the UK has concluded double taxation agreements with all present EU Member States.
Finally, the UK will no longer have to address issues arising from the proposal for a Common Consolidated Corporate Tax Base (CCCTB).