Tax Talk: Witholding Taxes – leaving the EU

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As we all know, the focus of the last few months has been on Covid-19, not Brexit. However, let’s not forget that the UK left the European Union on 31 January 2020 and will end its transition period on 31 December 2020.  During the transition period the UK is still following EU rules and trade agreements.

It is possible that at the end of the transition period, we will leave without a deal, which will mean leaving without a withdrawal agreement. With lots of commentary around at the moment about a no-deal Brexit, we thought it would be a good time to remind companies about the impact that this could have in relation to withholding taxes in respect of cross border payments of intra-group interest, royalties or dividends.

Today, the UK is able to make use of three EU Directives in relation to the above, which provide an exemption for withholding taxes. These Directives are used by the UK to ease cash flow, by ensuring that any payments made to the UK from an EU group company can be paid gross, without the application of withholding taxes where they may otherwise apply.

Equally, for payments made by UK companies to EU group entities, the UK can use the Directive to pay interest and royalties gross. The UK of course does not apply withholding tax on payments of dividends.

If we leave with no deal, the default position will revert to the relevant Double Tax Treaty that the UK has in place with the relevant EU Country, in order to establish the relevant rate of withholding tax. Although the UK has an extensive range of treaties with EU countries, not all permit zero withholding tax, for example Portugal and Italy. In addition to this, where relief has been applied for under the EU Directive historically, additional paperwork will need to be completed to ensure that the relevant Treaty Rate can be applied.

Although we do not know for certain if the UK will leave with no deal, now is the time to start reviewing your cross-border payments and receipts to identify how a no deal Brexit might affect you and what steps you can take to manage this.

If you have any questions, please get in touch.