A Brexit "no deal" checklist
From a tax perspective, the first batch of papers includes guidance arrangements for the application of customs duties on imports, from and exports to, the EU27 following a “no deal Brexit”. It also includes a paper on the proposed VAT treatment of supplies of goods and services to and from the EU27. (Our separate note on the VAT considerations can be found here).
There is little, if any, assistance on issues that might arise in a direct tax context. However In the absence of guidance from the Government, this note seeks to identify some of the direct tax issues which a corporate group might begin to consider in preparation for the UK leaving the EU on 29 March 2019 without a deal on its future relationship.
- Identify payment flows that rely on the EU Parent Subsidiary Directive or EU Interest and Royalties Directive for exemption from withholding taxes (and for which exemption will not be available after 29 March 2019).
- Consider whether it will be possible to make a claim under an applicable double tax treaty to reduce or eliminate any withholding taxes that may arise without the benefit of the Directives.
- If so, investigate the procedures that will need to be undertaken under the domestic laws of the jurisdiction of residence of the paying company to permit payments to be made gross or to reclaim taxes withheld at source.
- If not, identify the cash flow costs and whether any steps can be taken to reorganize payment flows etc. to mitigate them.
- For dividends received by UK companies from companies in territories (e.g. Portugal) that require dividends received by a UK company to be “subject to tax” in the UK in order to qualify for a reduced rate of withholding under the applicable treaty, consider whether or not it may be beneficial to make an election under s931R CTA 2009 to UK pay tax on the dividend received in order to secure the treaty rates of withholding.
- Consider whether it may be necessary to reorganise group structures to mitigate the consequences of UK companies ceasing to be EU companies.
- Review group structures to identify circumstances where the presence of UK companies (as non-EU companies) may affect the ability of companies in other EU member states to claim treaty benefits for example on payments to and from US companies (as a result of the limitation of benefits clause in relevant US double tax treaties).
- Determine whether the presence of UK companies in a corporate group involving other EU member states may break existing tax grouping relationships or consolidations. Quantify the cost of any clawback of reliefs in prior periods or loss to group relief / tax consolidation claims.
- Consider whether the CFC rules of other EU member states may become relevant, for example, UK companies which are subsidiaries of Spanish companies may no longer be able to rely on the exception for EU resident companies that can demonstrate valid economic reasons for their establishment.
- Identify past transactions and reorganisations involving UK companies which have relied upon reliefs under EU Directives (e.g. the EU Mergers Directive) or under the implementation in domestic laws of EU member states of fundamental freedoms under the EU Treaty or under domestic laws in EU member states which rely on a participant being a company which is resident in an EU member state. In some cases, these reliefs may be clawed back if a participant company ceases to be resident in an EU member state.
- Identify any companies that have migrated to the UK from an EU member state. Once again, reliefs granted or tax deferrals on the migration may be clawed back in the EU member state from which the company migrated where he migrating company ceases to be resident in an EU member state.
- Remember without a deal certain reliefs and corporate transactions will no longer be available after 29 March 2019. Transactions involving UK companies which rely upon, for example, the EU Mergers Directive or the Cross Border Mergers Directive must be completed before 29 March 2019. Time is running out.