The UK leaving the EU may have an impact on the way that you treat payments and receipts of interest, royalties and dividends for tax going forward. The EU has a number of directives in place aimed at reducing tax burdens within the single market, notably withholding taxes.
The EU Interest and Royalties Directive exempts most payments of interest and royalties between associated companies in member states from withholding tax where the recipient is the beneficial owner of the income. The Directive supersedes international double taxation treaties between member states and has therefore become relied upon.
The EU Parent-Subsidiary Directive eliminates withholding tax on dividends between associated EU companies
Post Brexit Position
UK Companies will lose access to the benefits of both Directives once the UK leaves the EU and therefore you will need to rely on the provisions on the individual tax treaties to remove the requirement to deduct withholding tax.
After Brexit UK companies will be required to deduct withholding tax at 20% on interest payments unless:
• HMRC has authorised gross payments
• The tax treaty in place with the relevant member state reduces the withholding tax to nil
Whilst the UK has 27 tax treaties to fall back on not all provide for a nil rate of withholding tax on interest and/or royalties, and some only reduce the rate of tax with the member state.
Royalties can be paid gross of withholding tax without prior clearance from HMRC if it is reasonable to believe that the payment at the time is entitled to relief under the treaty, otherwise withholding tax is 20%.
It is also important to note that treaty relief will only be granted when the interest and royalties are paid on an arm’s length basis in accordance with the Transfer Pricing guidelines.
The impact of losing the EU Parent-Subsidiary Directive in respect of dividends is mixed.
UK Law states that withholding tax isn’t required to be deducted from dividends paid by a UK Company.
However, where UK companies have relied on the Directive to eliminate withholding tax on dividends received from EU subsidiaries you will need to check the withholding tax rate in the relevant tax treaty with that member state
Action To Take Now
• Identify all payments of interest and royalties made to and received from EU associated companies
• Identify which rely on the EU Directive in order to mitigate withholding tax obligations
• Review the terms of the UK Tax Treaties with the relevant member state to confirm if withholding tax is reduced to nil
• Analyse existing arrangements with HMRC and identify applications to claim treaty relief that need to be made
• Review transfer pricing documentation to ensure that payments are on an arm’s length basis
• Consider alternative funding arrangements if loans are not on an arm’s length basis
For more information or if you have any queries please give one of our team a call on 01905 777600.