Brexit Tax Talk: Corporate Tax

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Now that the UK has now ceased to be an EU member state, the various EU Directives that relate to Corporate Tax no longer apply.

Interest, royalty and dividend payments

From 1 January 2021, the Interest and Royalty and Parent Subsidiary Directive, which prevented the imputation of withholding taxes on Interest, Royalties or Dividends on payments within EU based groups will no longer apply to UK Recipients or Payees.  As a result some EU countries will start to deduct tax from interest, royalty and dividend payments made to the UK

If your company is based in the UK and receives interest, royalties or dividends payments from an associated company in the EU you need to check the terms of the double taxation agreement in place between the UK and the relevant EU country.

The amount of tax deducted will depend on the double taxation agreement between the UK and relevant EU country. You can usually apply for full or partial exemption, or claim back some or all of the tax you have already paid under the relevant double taxation agreement. However, you may need to submit a new or revised claim to the tax authorities of the EU country, particularly if you have previously made a claim to reduce under the Directive. Any claims made under a Double Tax Treaty or the Double Tax Treaty Passport should remain the same, subject to the usual provisions.

Equally Companies that are based in the UK will need to reconsider the deduction of withholding taxes for payments of interest and royalties that it makes (the UK does not charge Withholding Taxes on dividends in any event), where previously it may have claimed relief under the Directive.  Identifying those claims made previously (which are no longer valid) should be straightforward enough, and replacement claims to relief or lower rates of withholding taxes can then be made under the appropriate tax treaty, if a benefit arises there.

Reliefs in respect of Cross-Border Mergers and Reorganisations involving companies incorporated in the UK and EU member states are no longer possible.  Cross Border Mergers were not applied frequently for UK Companies due to the complications and cost of structuring such arrangements under UK Company Law.  However, other routes of tax efficiently re-organising group structures involving EU and UK entities also relied on EU law derived reliefs and exemptions to prevent (or defer) exit charges from applying. 

Therefore greater care and advance planning of such reorganisations of cross border groups with EU elements are likely to be required in the future, and could become more expensive in tax terms.