Brexit: how will it affect UK holding companies?

With its low corporate tax rates, extensive treaty network and limited withholding taxes, the UK is generally regarded as a favourable location for a holding company. How will Brexit affect that perception?

The UK is currently a key gateway for foreign investment into the European Union. UK Government figures show that in 2014 the UK was the chosen location for 36% of new inward investment projects with headquarters in Europe1. There are, of course, a plethora of reasons for businesses to choose the UK as their headquarters location with tax only one factor (and, on the whole, not the determining factor). However, tax can certainly be an important factor in setting up a holding company for EU investment, so how will Brexit affect the tax position?

Inbound withholding taxes

The EU has implemented a number of Directives designed to enhance the single market and remove barriers to the operation of the fundamental freedoms. In this context, two important Directives are the Parent-Subsidiary Directive and the Interest and Royalties Directive, which, broadly, prohibit the imposition of withholding taxes on intra-group payments of dividends, interest and royalties between companies which are members of the same group and within the EU.

Following Brexit, the UK will no longer be a Member State of the EU and, in principle, EU subsidiaries will no longer be able to rely on the provisions of these Directives to make payments to UK parent companies free of withholding taxes. However, the UK’s extensive network of double tax treaties will not be affected by Brexit and, in many cases, will also provide relief from withholding taxes that might otherwise be imposed. Not all treaties provide for 0% withholding taxes, however. The table below gives an indication of the post-Brexit position in relation to withholding taxes in those EU jurisdictions which are the main recipients of investment via the UK.

Member State  Dividends Interest Royalties 
Belgium 0%2 0/10%3 0%
France 0%4 0% 0%
Germany 5%5 0% 0%
Ireland 0/5%6 0% 0%
Italy 5%7 0/10%8 0%
Luxembourg 0/5%9 0% 0%
Netherlands 0%10 0% 0%
Spain 0%11 0% 0%
Sweden 0%12 0% 0%

Nevertheless, there may be other indirect treaty consequences. For example, following Brexit, the UK will no longer be an EU Member State for the purposes of applying the limitation on benefits (LoB) clause in US double tax treaties (for example, with Ireland and the Netherlands), such that treaty benefits may in some cases be lost on payments from a US source to a subsidiary of a UK holding company located in those jurisdictions.

UK withholding taxes

From a UK tax perspective, less is likely to change. The UK does not generally impose withholding taxes on dividends. The UK does impose withholding taxes on certain payments of interest and royalties and again the position would depend on the nature of any double tax treaty in force between the UK and the Member State of the recipient jurisdiction. The table below shows the current position in relation to withholding tax rates on interest and royalties between the UK and selected other Member States.

Member State Interest Royalties
Belgium 0% 0%
France 0% 0%
Germany 0% 0%
Ireland 0% 0%
Italy 0/10%13 8%
Luxembourg 0% 5%
Netherlands 0% 0%
Spain 0% 0%
Sweden 0% 0%

It should, however, be noted that the UK is due to impose withholding taxes on a wider range of IP related royalty payments in Finance Act 2016 and these rules will, in some cases, override the position in the double tax treaty. See the article, “Extension of UK withholding tax on IP royalties”.

Other tax factors

Other tax factors which make the UK an attractive location for a holding company appear unlikely to change as a result of Brexit, particularly as the UK seeks to ensure it remains an attractive place for business.

The UK has a low rate of corporation tax at (currently) 20%, with the promise of lower rates of 19% on 2017/18 and 17% from 2020/21.

The UK provides a tax exemption on capital gains on the sale of shares in a trading company or the holding company of a trading group (the substantial shareholdings exemption) on which the Government is currently consulting with a view to ensuring that it operates as intended - a consultation which may see the scope of the exemption widened to some degree. (See the article, “Reform of the UK’s substantial shareholdings exemption”.)

The UK makes available the remittance basis of taxation for non-UK domiciled individuals who come to the UK, for example as directors of the holding company. This allows short-term, non-UK domiciled individuals to shelter offshore gains and income, provided that they do not remit the proceeds to the UK. However, there is a charge for longer term UK residents for accessing the remittance basis of taxation and, in addition, the UK will introduce rules in 2017 to deem UK domiciled persons who have been resident in the UK for 15 out of 20 years or who have a UK domicile of origin and return to the UK.

Finally, it is worth noting that there is no suggestion that Brexit will affect the UK’s implementation of the OECD’s BEPS measures. The UK has been an enthusiastic and early adopter of BEPS measures (such anti-hybrid rules, CbC reporting and interest restrictions) and the fact that the UK will no longer be part of the EU is unlikely to affect implementation of BEPS measures in the UK (whether or not in response to the wider EU Commission driven Anti-Tax Avoidance Directive). Equally, in relation to global moves towards greater tax transparency, the UK remains a Model 1 IGA jurisdiction for FATCA purposes and a participating jurisdiction that is an early adopter of the Common Reporting Standard (CRS).

Comment

Overall, it is likely that the withholding tax position in relation to payments to and from a UK holding company from EU based group members will, in most cases, remain favourable. As such, we would not expect the tax consequences of Brexit to result in a need, in most cases, to restructure businesses. Of course, there may be other regulatory and economic reasons why business restructurings will take place.

In addition, it should be emphasised that the UK’s extensive network of tax treaties outside the EU will be unaffected by Brexit. As such, the UK’s position as a favourable holding company jurisdiction should largely remain unaffected.

 




1 Invest in the UK: your springboard for global growth

2 0% if the recipient is a company which which holds, for an uninterrupted period of at least twelve months, shares representing directly at least 10% of the capital of the company paying the dividends. 

3 0% in relation to interest paid in respect of a loan of any nature granted or a credit extended by an enterprise to another enterprise. 

4 0% if paid to a UK company liable to corporation tax which holds, directly or indirectly, at least 10% of the capital in the company paying the dividends, otherwise 10%. 

5 5% if the beneficial owner is a company (other than a partnership) which holds directly at least 10% of the capital of the company paying the dividends, otherwise 15%

6 5% if the beneficial owner is a company which controls directly or indirectly 10% or more of the voting power in the company paying the dividends. Exemption from Irish withholding tax on dividends is available where the recipient of the distribution falls into one of a number of categories of foreign company and provides an appropriate declaration (such as where not owned by Irish residents). Otherwise 15%. 

7 5% if the beneficial owner is a company which controls, directly or indirectly, at least 10% of the voting power in the company paying the dividends, otherwise 15%

8 0% rate applies in connection with the sale on credit of industrial, commercial or scientific equipment or in connection with the sale on credit of goods delivered by one enterprise to another enterprise. 

9 5% if the beneficial owner is a company the capital of which is wholly or partly divided into shares and it controls directly or indirectly at least 25% of the voting power in the company paying the dividends, otherwise 15%. However, full exemption may be available where the participation exemption applies which generally requires a 10% shareholding or an acquisition price of EUR 1.2m and an uninterrupted holding period of at least 12 months. 

10 0% if a company controls at least 10% of the voting power of the Dutch company paying the dividends, otherwise 10%. 

11 0% if the recipient is a company that directly or indirectly holds at least a 10% interest in the paying company, otherwise 5%. 

12 0% if the beneficial owner is a company that controls at least 10% of the voting power of the paying company. Otherwise dividends are taxable at a maximum rate of 5%. 

13 0% rate applies in connection with the sale on credit of industrial, commercial or scientific equipment or in connection with the sale on credit of goods delivered by one enterprise to another enterprise.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.