Brexit no-deal tax traps for UK firms with EU connections

Do you have an EU subsidiary, minority interest in an EU company, or an EU branch?

If so, you can currently receive dividends, interest and royalties without suffering local withholding tax (WHT).

Are you owned by an EU company, or does an EU company own a minority stake?

If so, you can currently pay interest and royalties without deducting and accounting for UK WHT.

These benefits may cease in the event of a no deal Brexit, when both the EU Parent/Subsidiary Directive and the EU Interest and Royalties Directive will cease to have effect. 

Under the Directives, where the conditions are met, no WHT is due.

When the Directives cease to have effect, taxpayers will be relying on individual bilateral treaties between the UK and the correspondent EU Member State. Those treaties will set the rate of WHT which needs to be applied to any payments.

This means:

• Increased administrative burden.
• Potential cashflow implications.
• Potential real increased tax cost.

Businesses should:

• Review whether WHT will be applicable to future payments.
• Accelerate payment where possible.
• Consider future cashflow implications.
• Model whether increased tax cost arises.
• Review commercial structures and arrangements.

For example, a UK company with a German subsidiary can currently receive German dividends tax free.  But the UK/Germany Double Tax Treaty applies a 5% WHT so a tax cost arises if we have no deal, reducing funds available for investment.

There are many other issues to consider. If you are concerned about the tax consequences of Brexit, please contact our international tax team for advice.