United States

Withholding tax risks after Brexit deal rejected

U.K. legislators rejected Brexit agreement negotiated with the EU

TAX ALERT  | 

Legislators in the U.K. voted Jan. 15 to reject a Brexit agreement negotiated with the European Union. As a result, beginning March 29, 2019 U.K. companies receiving interest, royalties and dividends from related companies in the EU may be subject to withholding tax. Many multinational corporations with significant business operations in the U.K. or a holding company in the U.K. have already undertaken contingency planning surrounding Brexit. Multinational companies that have just begun planning should accelerate their planning. Multinational companies that have not undertaken any contingency planning should immediately begin to undertake an analysis of how Brexit affects them.

Background

Currently, the EU Interest and Royalties Directive and EU Parent/Subsidiary Directive exempts most payments of interest, royalties and dividends between related companies in EU member states from withholding tax. It was anticipated that any withdrawal agreement between the EU and UK would have provided for a 21-month transition period in which the EU Directives would have continued to apply to exempt these payments from withholding tax. As a result of the rejected Brexit agreement, and increasing possibility of a no deal Brexit, businesses now face a potential “cliff edge” in which withholding tax may need to be withheld beginning on March 29, 2019.

In the instance of a no deal Brexit, withholding tax on interest, royalties and dividends will be determined based on bilateral income tax treaties that are currently in place between the U.K. and various jurisdictions within the EU. In some instances significant amounts of withholding tax may now apply.

Next steps

As a next step, affected businesses that have not already done so are advised to:

  • Identify all material interest, royalties or dividend amounts made to or received from companies in the EU;
  • Determine which payments rely on an EU Directive to mitigate local withholding tax obligations;
  • Analyze the terms of the UK tax treaty with the relevant member state to confirm the withholding tax rate and quantify the expected cost of relying on the treaty; 
  • Where treaty relief may be available determine the documentation necessary, if any, to apply the reduced treaty rate;
  • Determine what documentation would need to be submitted (e.g., residency certificates) to obtain the treaty rate; and
  • Consider whether to restructure operations to obtain lower withholding tax rates.

Of course, increased withholding tax is only one of the many consequences that may result from a so-called “hard” Brexit. Businesses should consult their advisors to better understand the additional legal, tax and operational challenges that may impact their operations.

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