Amid the Economic Uncertainties of the Brexit, New Challenges in Corporate Tax Structuring for UK Companies (And Their Parents, Subsidiaries, Trading Partners, Among Others)Print PDF
The June 23, 2016 “leave” Brexit vote has left many in the business and legal communities stunned, and while uncertainties abound, there is no doubt that wading through the economic and administrative complexities of exiting the EU will take time. From a tax perspective, the Brexit has certain obvious implications for the UK and the remaining EU member nations, as well as a host of potential consequences that may—or may not—come to pass (particularly because we have yet to see the terms upon which the UK will exit the EU). A few of the notable tax complexities in the wake of the Brexit are described below.
- Withholding Taxes. The UK has been part of the EU for long enough that it’s possible to take the EU’s favorable treatment for multi-global companies (often set forth in published “directives”) for granted. After the Brexit, however, companies with UK operations may find themselves faced with significant new challenges. Most notably, the “Parent-Subsidiary Directive” and the “Interest and Royalty Directive” prohibit withholding taxes on intra-group interest, dividend and royalty payments made within the EU. This will at a minimum pose substantial administrative challenges, and old treaties will be revisited to find ways to navigate forward. At worst, there could be a material chilling effect on foreign investments structured through the UK, or on the willingness of EU parent companies to set up or maintain UK subsidiaries. Some bilateral tax treaties may eliminate withholding taxes on payments of dividends or interest made by EU subsidiaries to their UK holding companies, but there are questions of interpretation, and not all treaties provide for a 0% withholding tax. The resulting tax consequences and complexities—which are likely to result in a material additional tax cost for British corporations with EU subsidiaries—have been noted by major British corporations: in February, just under 200 British companies (among them BP Plc and AstraZeneca Plc) signed a joint letter published in the Times of London. The letter strongly advocated a “remain” vote, warning that the economic consequences of leaving the EU could hurt UK investments and jobs.
- Lack of Certainty in Absence of Authority. In addition, EU case and procedural law provides certain tax protections that apply to all member nations, and the UK will no longer be able to assume that such protections apply. For example, the EU CFC (“controlled foreign company”) rules cannot apply to subsidiaries established in another EU state unless the arrangements are entirely artificial. The applicable decision was motivated in part by the perceived importance of freedom of establishment among EU member states (regardless of whether certain member states have low effective tax rates). Moreover, certain anti-avoidance rules could be triggered automatically by the Brexit, since many exemptions are explicitly to EU members.
- Old laws, new again? The UK will have the ability to introduce tax legislation that is contrary to EU law, but what about UK laws that were superseded by EU directives and protections and never officially repealed? There could be traps for the unwary and unpleasant surprises ahead—for example, the 1.5% stamp duty tax on UK shares issued into certain clearing systems (DTC, Clearstream, and Euroclear) may be an additional economic cost for UK companies.
- The list goes on: VAT, Customs Duties, Transfer Pricing…the Brexit has implications for the value added tax (the UK will be outside the reach of the EU value-added tax), transfer pricing, and perhaps most importantly, the necessity for new customs procedures—and customs duties that may further disadvantage UK companies against EU industry competitors. The UK’s largest trade partners are EU member nations, and the Brexit will add significant complexity from an administrative as well as an economic perspective.
There will be many ripple effects of the Brexit—some are generally foreseeable, and others will no doubt emerge in the years ahead. Tax laws in the UK may diverge (in some cases sharply) with the EU (for example, the UK may counter the financial instability triggered by the Brexit by lowering UK corporate taxes more aggressively than currently planned), and conversely, the EU may find an easier road toward implementing rules to simplify and harmonize the tax regimes of member nations. In any event, the historic Brexit vote will pose challenges not just politically, but also from legal, commercial, and general economic perspectives.
This advisory was prepared by Elizabeth M. Norman, a partner in Nutter’s Tax Department. For more information, please contact Elizabeth or your Nutter attorney at 617.439.2000.
This advisory is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.