The ultimately successful attempts to negotiate a trade deal between the European Union and the UK focused attention on the VAT and Customs Duties issues. We now look at what this means for corporate income taxes in the months and years ahead.
The Parent Subsidiary Directive
This Directive is only available to entities established in one Member State that have subsidiaries in other Member States, so it ceased to apply on 1 January 2021 to the UK. The directive aims to exempt dividends and other profit distributions paid by subsidiary companies to their parent companies from withholding taxes – thereby eliminating double taxation of such income at the level of the parent company.
However, the practical impact of this change will be limited as the UK holds double tax treaties with many individual EU Member States, which typically exempt such income from withholding taxes, particularly in the case of significant shareholdings.
Currently, the UK has no withholding tax on dividends paid to non-residents, excepting a withholding tax of 20% in respect of Real Estate Investment Trusts. Withholding tax can, however, apply to payments of interest and royalties in certain circumstances.
Interest and Royalties Directive
This Directive exempts any taxes imposed on payments of interest or royalties made by a company in one Member State, whether by withholding tax or by assessment, provided that the beneficial owner of the interest or royalties is a company established in another Member State or has a permanent establishment situated in another Member State. It also ceased to apply from 1 January 2021 to transactions between group members when the recipient company is established in the UK.
As with the Parent Subsidiary Directive, it is anticipated that many of these arrangements will continue after 1 January 2021 due to existing bi-lateral double tax treaties between the UK and EU Member States. However, affected groups should review their payment flows to determine whether they will have to account for withholding tax (with refunds) on any such payments as the treaties may not include benefits equivalent to those under the Parent Subsidiary and Interest and Royalties Directives,
The Mergers Directive
The Mergers Directive is intended to remove tax obstacles to EU cross-border re-organisations. From 1 January 2021 mergers, reorganisations and asset transfers between UK and EU established companies no longer benefit from its provisions.
Unless an equivalent agreement can be put in place, problems could arise, for example, where a company transfers assets or liabilities to a UK company from a group member established in an EU Member State. Subject to any relevant provisions in the applicable bilateral double tax treaties, it is possible that exit taxation could be assessed at the point of transfer on the difference between the real value and the book carrying value of those assets or liabilities.
Directive for Administrative Co-operation
The Directive for Administrative Cooperation provides for data exchange between the tax authorities of Member States, specifically in respect of:
- income and assets related to employment income, pension income, directors’ fees, income and ownership of immovable property and life insurance products
- financial account information
- cross-border tax rulings and advance pricing arrangements
- beneficial ownership information
- cross-border tax planning arrangements.
It is currently unclear how this legislation will be affected by the UK leaving the EU. It is probable that the legislation will remain on the UK statute book, but presumably both automatic exchange of the information above and requested information cannot be supplied between the EU and the UK from 1 January, excepting new legislation.
In respect of the exchange of financial account information, this is in line with the OECD’s Common Reporting Standard of which the UK and the EU Member States are signatories. Consequently, it is likely that an agreement will be made at some point in the future in respect of exchanges of such information. The EU already has such agreements with countries such as Switzerland and Andorra.
In respect of DAC 6, covering automatic exchange of cross-border tax planning arrangements, the Directive specifies that it also covers situations where one side of the arrangement is in a 3rd country. From an EU perspective, this means that cross-border arrangements involving one Member State and the UK would still be reportable arrangements in the EU, subject to the application of applicable hallmarks. The UK has decided to put into place a more simplified system rather than DAC 6
Anti-Tax Avoidance Directive
Based on the OECD BEPS Actions, this directive has been written into law in all EU Member States and, in the UK, so the provisions continue to apply equally on either side of the Channel from 1 January 2021. It is uncertain as to whether the provisions will remain aligned in the future.
SRC-Time are one of the South East’s leading accountancy firms in advising the self-employed and partnerships in all aspects of their tax affairs and we are able to assist in any issue raised above.
Our expert team is available to provide you with advice and can be contacted on 01273 326 556 or you can drop us an email at email@example.com or speak with an account manager to get any process started.