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Article:

Group business tax in the EU after Brexit

15 April 2019

Although the threat of a no-deal Brexit appears to be receding, Brexit day has also been delayed again – possibly to 31 October 2019 (or even beyond). When the UK does eventually leave the EU, it now seems likely that the established Withdrawal Agreement will apply, providing transitional arrangements for direct taxation. For example, the UK will continue to apply the provisions of its domestic law that transpose the Parent-Subsidiary Directive and Interest and Royalties Directive into UK law.

However, the treatment of the UK from the perspective of the other EU member states is less clear: the provisions of the Withdrawal Agreement do not lay down a commitment for the treatment of the UK’s status by the other EU member states in their domestic tax legislation.

With all the focus on the difficulties the UK has had in approving the Withdrawal Agreement it could be easy to overlook the preparations that other EU member states have been making to limit the impact Brexit may have on their domestic direct tax legislation. This article will summarise some key developments in other EU member states.

Germany

In February 2019, the German government passed a ‘Brexit Tax Accompanying Act’ – ‘Brexit-Steuerbegleitgesetz’ – covering primarily transitional tax matters as well as specific measures for insurers/reinsurers. While this was created to come into force if there is a no-deal Brexit, the rules will also apply after any withdrawal transition period expires (ie from 1 January 2021).

The purpose of the legislation is to ensure a smooth transition for UK connected businesses when the UK ceases to be a qualifying EU member state: without the new rules, many businesses would fail to qualify for beneficial German domestic tax provisions. The relaxations will apply for 21 months from the date of Brexit and the key areas where German law will be relaxed include:

  • No liquidation of a corporation as a result of Brexit – when a corporation relocates its headquarters or registered office to outside of an EU member state it is deemed to have been dissolved and the liquidated funds become taxable. This provision will not allow Brexit to be a triggering event for this purpose.
  • Transitional arrangements to prevent the realisation of hidden reserves as a result of a company ceasing to be an ‘EU corporation’
  • Transitional arrangements for cross-border mergers.
  • Prevention of tax arising solely as a result of Brexit on gains from capital contributions or share swaps (which are typically tax neutral in Germany if the other party is in an EU member state).
  • Assets transferred to an EU member state permanent establishment (from Germany) would previously have been able to spread any resulting gain over several years – the transitional rules will extend the spreading provisions to the UK when it ceases to be an EU member state, allowing any ‘withdrawing gain’ to be spread equally over five years.

Netherlands

The Netherlands government published a draft decree on 8 March 2019 containing transitional tax rules to assist the transition if the UK leaves the EU without an agreed Withdrawal Agreement: this envisages a relaxation of Dutch tax law until 30 June 2020. Again the key measures are intended to stop businesses involuntarily failing to qualify for tax reliefs because the UK is no longer an EU member state – the key relaxations are:

Fiscal unity

Currently Dutch subsidiaries with a mutual intermediate EU member state parent holding company can form a Dutch fiscal unity (corporate income tax consolidation within the Netherlands). Following a no-deal Brexit, a UK parent would no longer fulfil the condition of being in an EU member state, therefore, the fiscal unity of the Dutch sister companies could be broken.

The proposed laws would plan a transition period to prevent mid-fiscal year changes and allow for the impact of the breaking of the fiscal unity to fall either at the end of 2019 or the end of a financial year that started before 30 March 2019.

Participation exemption

Where a Dutch parent owns a UK company, to qualify for the Dutch participation exemption the parent company must hold either a 5% share of the nominal paid up capital or 5% of the voting rights, provided that the other state is an EU Member State and has concluded a tax treaty with the Netherlands. For parent companies qualifying via the 5% of voting rights route, the transitional law will operate so that the participation exemption would only expire after the end of the current financial year (rather than on the day the UK leaves the EU).

Italy

In Italy, Law Decree (No. 22) entered into force on 26 March 2019 to provide for stability in the event that the UK leaves the EU without a deal. If the Withdrawal Agreement between the UK and the EU is approved, the transition rules within that agreement will be applied instead of the proposed Italian domestic measures.

The fall back Italian rules state that the Italian domestic tax law provisions which currently apply because the UK is an EU member state will continue to apply during a transition period of 18 months following the UK’s no-deal withdrawal date. The key relaxations are:

  • The EU parent-subsidiary directive and interest and royalties directive will continue to apply to payments of dividends, interest and royalties from Italian companies to UK companies
  • Italian sister companies that are able to form a tax consolidation under Italian tax law if they are headed by an EU member state parent company will continue to be able to form an Italian tax consolidation during the transition period
  • The tax treatment provided by the EU merger directive will continue to be applied from an Italian tax perspective.

Conclusion

While these measures will undoubtedly be helpful to international groups in coping with the tax impact of Brexit, they do clearly illustrate the increasing tax complexity that will arise for international groups.

Despite the current hiatus in Brexit, groups with EU establishments should keep up to date with related tax developments across the EU that may help with group reorganisations. For help and advice please contact Nick Udal or Tim Ferris.

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