Brexit – what are the corporate tax implications for companies?

On 29 March 2017 the UK Government triggered Article 50 of the Lisbon Treaty to formally notify its intention to leave the European Union (“EU”) within a two year period.

Although it is difficult at this stage to provide specific details of how the UK taxation system will be impacted by Brexit, the likelihood is that there will not be any immediate change to direct and indirect taxes. The actual tax impact of Brexit will be better understood once the terms of any Brexit agreement have been concluded with the EU.

Corporate tax rates

One early impact results from the Government’s concern that the UK will not be as attractive as a base for multinational companies once it is outside of the EU. A recent study has found that Britain’s ranking in a league table of multinationals’ favourite tax regimes has fallen from first to being only the fifth best regime in Europe, although  Britain remains the second most competitive tax regime in the world. These concerns have prompted the Chancellor to reduce the corporation tax rate from 20% to 19% from 1 April 2017 and reducing to 17% from 1 April 2020, these reductions benefitting all companies.

EU laws and directives

Direct taxes are imposed by UK law and as such, the majority of the UK’s direct tax law will remain unchanged following Brexit. However, the UK’s direct tax rules must comply with EU laws and post-Brexit, some UK tax laws may no longer be required to comply with some EU laws and EU directives.

This will potentially impact on UK companies within a group with subsidiary companies based in the EU. To date the EU has implemented a number of harmonising directives.  The most important are the Parent-Subsidiary Directive and the Interest and Royalty Directive, which prohibit withholding taxes on intra-group interest, dividend and royalty payments made within the EU.

EU subsidiaries would not be able to rely on these Directives to be able to pay dividends or interest to their UK holding companies free from withholding taxes. Relief under bilateral double tax treaties would be an alternative, and in many cases would also eliminate withholding taxes entirely. However, not all treaties provide for a 0% withholding tax for example, problems may persist in relation to dividends paid by German and Italian subsidiaries.

Although there are numerous double taxation treaties in place with the UK, it may be the case that full relief for all withholding taxes, whether on dividends, interest and royalties is not available in some cases adding complication to the UK tax system.

EU State Aid

At present the UK offers various tax incentives to assist businesses but these are subject to limits imposed by the EU, which deems excessive tax giveaways to be “State Aid” and contrary to the idea of a single European market. The tax reliefs currently subject to EU State Aid rules include:

  • Small and Medium Sized Enterprise Research & Development tax relief
  • Enterprise Investment Scheme and Seed EIS
  • Enterprise Management Incentive (“EMI”) share options

The EU State Aid restrictions would cease to apply post-Brexit, freeing Westminster to increase the value of the existing tax breaks, or introduce new tax incentives if it sees fit. Any new tax reliefs or incentives could be very specifically targeted, for example, the Government could choose to use them to boost the “Northern Powerhouse”. However it should be remembered that the UK may not have a completely free hand if we become a member of another trading group which may also have restrictions on state subsidies.

It is still early days in the Brexit negotiations and the final impact on UK companies form a tax perspective remains unclear. We will seek to keep you informed as the exit planning proceeds.

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