To date the EU has implemented a number of harmonising Directives intended to support the four freedoms (the free movement of goods, services, people and capital).
From a tax perspective, the most important are the Parent-Subsidiary Directive and the Interest and Royalty Directive, which prohibit withholding taxes on intra-group interest, dividend and royalty payments made within the EU.
Although direct taxes are imposed by UK law (therefore the majority of it will remain unchanged following Brexit) rules must however comply with EU laws.
Post-Brexit, such requirements will fall and UK tax law may no longer be required to comply with some EU laws and some or all of the EU directives should no longer apply to UK companies.
Therefore, UK companies will need to turn to double taxation treaties in place to benefit from preferential withholding tax rates.
Although there are numerous double taxation treaties in place with the UK, it may be the case that full relief (for all withholding taxes, whether on dividends, interest and royalties) will not always be obtainable.
Directives such as the EU Parent Subsidiary Directive, which provides relief from withholding taxes on dividend payments made between associated companies in different EU states and provides double taxation relief to parent companies on profits of subsidiary companies, will no longer be available.
The EU Interest and Royalties Directive will no longer be available to relieve withholding taxes on royalty and interest payments between UK companies and associated companies in the EU and it will therefore be important for UK companies to explore the extent to which relief from interest and royalty withholding is available under any double taxation treaty.
The EU Merger Directive offers tax relief to cross-border reorganisations. Once the UK has left the EU, the sections of the EU directive relating to EU member shares would no longer apply to the UK and this could give rise to increased tax costs in the UK for businesses undertaking merger transactions.
Many multinationals EU headquarters are based in the UK. EU subsidiaries would not be able to rely on these Directives to be able to pay dividends or interest to their UK holding companies free from withholding taxes, however, relief under bilateral double tax treaties will in many cases allow to eliminate withholding taxes entirely.
With regards to payment of dividends from the UK, it must be noted that domestic tax law does not impose dividend withholding taxes on such payments. It does impose interest and royalty withholding taxes, although broadly treaties with EU member states reduce the withholding rates to 0% in most cases.
Overall, the withholding tax position will be generally manageable because of the UK’s many double tax treaties.
We, however, suggest reviewing how your business rely on the above directives to make sure that, even after these changes, no withholding tax will impact after March 2019 or to operate in due time some sort of contingency plan to avoid it from happening.