Brexit: tax issues on business restructurings

​An overview of the tax issues that need to be considered by businesses undertaking restructurings in the wake of Brexit.

The direct implications of Brexit on taxation in the UK is considered in our article, Brexit : the tax implications. However, quite apart from the direct implications for UK taxation, Brexit will most likely result in a great deal of business restructuring, which will, in itself, give rise to significant tax implications.

In particular, membership of the EU provides a “passport” to carry on certain regulated business within other EU Member States in a range of industries. These include UK based banks and other financial service providers. In the wake of Brexit, UK firms will most likely cease to benefit from the ability to provide services cross-border or establish branches under relevant passports. At the very least, new licences are likely to be required and businesses may in some cases need to be restructured. The tax implications of any such restructuring would need to be carefully considered.

Restructurings resulting from Brexit are likely to involve the setting up of operations, including subsidiaries, in remaining EU Member States and the transfer or migration of existing UK businesses. The transfer of assets, services and people to such new subsidiaries (or branches) may have significant tax consequences. In particular, the transfer of assets to a new entity will, in principle, result in a disposal for tax purposes.

At present, the EU Cross Border Mergers Directive provides for tax relief for mergers between companies incorporated in different EU Member States, provided certain conditions are satisfied. The regime, whilst enacted into English law, derives from EU legislation and when the UK ceases to be an Member State, references to “Member States" in the legislation of other EU members will cease to include the UK, meaning relief for such mergers in other Member States will no longer be available.

The particular tax implications will depend on the exact nature of the relevant restructuring. However, restructurings may generally give rise to a number of different tax considerations, including, for example:

Transfer of a UK trade/business

The transfer of a UK business to a new EU entity in return for an issue of shares would currently take place on a no gain, no loss basis by virtue of the UK’s implementation of the EU Mergers Directive (TCGA 1992 s.140A). However, since the result of Brexit will be to leave the UK outside the EU, then, whilst the provisions of this Directive are enacted into UK law, the UK will cease to be an EU Member State and Section 140A would cease to apply on such a merger. Accordingly, any such restructuring taking place after Brexit has become effective may potentially give rise to tax charges on the assets involved in such a transfer which have risen in value. However, it should be noted that TCGA 1992 Section 171 may also provide for a no gain no loss transfer in many such cases.

Transfer of a non-UK trade/business

The transfer of a non-UK business by a UK company to a new company in another Member State may equally cease to benefit from the current advantageous treatment under the Mergers Directive. Since references to "EU Member States" in the legislation of other EU members will cease to include the UK, any mergers involving assets in other Member States will, most likely, no longer benefit from tax relief under the existing framework in that Member State following Brexit.

From a UK tax perspective, TCGA 1992 Section 140C together with TIOPA 2010 Section 122 implements the Mergers Directive and this provision gives the UK transferor double tax relief for notional tax which would have been payable in the local Member State. Confusingly, the existing provisions of Section 140C do not explicitly depend on the UK being part of the EU and so may, technically, continue to apply in the absence of amendment. This serves to exemplify how difficult applying these provisions may become following Brexit and how, in practice, new UK rules would be required. More generally, TCGA 1992 Section 140 provides for a general Capital Gains Tax (CGT) deferral on the transfer of assets of a non-UK trade to a non-resident company in return for an issue of shares. As such, deferral of gains on the incorporation of an overseas branch should still be possible from a UK tax perspective, even if the Mergers Directive provisions do not survive Brexit. The conditions for the relief are stringent, and deferral only applies where the UK company carries on a trade through a permanent establishment, so that relief would not be available for non-trading branches or for assets not used in the trade of the branch, however.

Furthermore, where an election has been made for the Permanent Establishment (PE) or branch to be treated as UK tax exempt under CTA 2009 Section 18A, then the transfer of the branch assets to a new local subsidiary would also be outside the UK tax provisions.

Migration

If a business sought to relocate outside the UK following Brexit, then the UK tax rules on corporate migrations will be relevant to consider. For example, a company which ceases to be resident in the UK is deemed to have disposed of and reacquired all of its assets at market value immediately before ceasing to be UK tax resident. This may result in a chargeable gain arising, which would be subject to UK tax.

At present, it may be possible for a company to postpone tax payable if it becomes resident in an EEA Member State and meets a number of other conditions (TMA 1970 Schedule 3ZB), but it is far from certain that such relief will continue to apply following Brexit.

Other tax consequences of a transfer/merger

The physical movement of goods from the UK to a remaining Member State may give rise to a number of tax issues. Customs duties may be relevant, since the UK will no longer be part of the customs union of the EU in the absence of a new customs agreement. Equally, import VAT may become chargeable on the importation of goods into the EU from the UK.

Tax consequences of the new arrangements

The tax consequences of a reorganisation would not end with the taxation of the actual transaction effecting the reorganisation. There will also be the tax implications of the new arrangements between the UK and other parts of the business going forwards to consider.

For example, it may well be that, whilst the business has been transferred to or created in another Member State for regulatory purposes, many of the functions, including people functions, might remain in the UK. Clearly, this would give rise to transfer pricing considerations at the very least with the UK business required to charge an arm’s length fee for such services. It is also possible that the diverted profits tax (DPT) provisions may have some impact in this situation were HMRC to consider that the arrangements lacked economic substance.

A UK parent with a new non-UK subsidiary might also have to consider the implications of the UK’s Controlled Foreign Companies (CFC) rules, as well as tax issues associated with funding its subsidiary and repatriating profits to the UK.

In addition, services provided to a new EU subsidiary would be subject to VAT (assuming VAT continued in a form similar to the present rules). In this case, the B2B rules would continue to apply in most cases, however, such that VAT would continue to be charged where the recipient belongs. Supplies to EU branches might fall outside the scope of VAT, unless the EU branch was VAT grouped locally in which case Skandia considerations would be relevant.

Conclusion

It is possible that Brexit will lead to a significant amount of business reorganisation, particularly in the field of financial services where the benefits of current passporting rules are likely to be lost. The possible tax implications of such business reorganisations should not be underestimated in the absence of the protections currently afforded by the Mergers Directive. In practice, it seems certain that the UK would need to amend or replace the existing UK tax provisions dealing with EU mergers. Nevertheless, in the absence of EU wide action, adverse tax implications may arise in other Member States on the incorporation of existing businesses.

As a result, businesses likely to be affected should consider their options sooner rather than later before Brexit actually becomes effective and whilst the current beneficial rules remain in place.

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.