Brexit and direct tax: what are the latest developments?

21/06/19

Avoid additional tax fees, adjust your legal structure.

With Brexit being delayed until 31 October 2019, companies now have more time to prepare themselves. We took stock of the situation and noticed that some companies still need this extra time. What do they have to pay attention to and work on until October? Following a previous article about the supply chain, tax advisor Jan-Willem Thoen now discusses the issue of direct taxes in this second interview in our series.

‘If a company from outside Europe wanted to get a foothold here, until a few years ago it would often open a European headquarters in London,' says Jan-Willem Thoen. That obvious choice is a thing of the past. Because as soon as the United Kingdom leaves the European Union, a London office will no longer be a European office. It is logical for all sorts of reasons, including taxes, that these companies are now opting for a place on the European continent.'

As far as direct taxes are concerned, according to Jan-Willem Thoen the implications for new activities is clear: 'Within the EU, cross-border dividend, interest and royalty payments are exempt from withholding tax. A European head office in the UK will soon be located outside the EU, making it expensive to send money back and forth. Because if that office charges royalties in 27 EU countries after Brexit, it will have to pay withholding tax in many of those countries. If such a European head office is located in the Netherlands, the European exemptions will apply.’

Legal structure scrutinised

Thoen sees companies scrutinising their legal structure, as those may be fiscally inefficient after the UK's withdrawal. ‘When the European withholding tax exemption no longer applies to the UK, bilateral treaties will apply. The Netherlands concluded a tax treaty with the UK in 2011, stating that our country levies zero percent dividend tax on payments to the UK. But Germany, which has a much older treaty, still charges five percent dividend tax. Italy also has an older treaty with a similar percentage.’

What do clients do with this knowledge? British companies use their Dutch activities as a kind of headquarters for continental Europe. In this way, they make their activities in Germany a legal part of Dutch activities: 'Payments from Germany to the Netherlands are European, and thus  exempted, and those from the Netherlands to the UK will soon be zero percent according to the bilateral treaty. This saves five percent margin on the German activities. I see many parties now implementing this type of restructuring. In the opposite direction, British companies that distribute dividends to divisions in the Netherlands do not pay dividend tax and will not do so, even after Brexit. But withholding tax on royalties and interest may be levied. This impact can should be taken into account in the considerations.

Dutch companies with connections to the UK

For companies based in the Netherlands with connections to the UK, Thoen advises them to make an analysis of all the costs they incur in the UK after Brexit. ‘This is not so much a matter of taxes, because most of them will be paid in the Netherlands, but of customs costs, among other things. For example, I have a customer who says: ‘The UK is 2 percent of my market that I can easily serve now, but if I have to incur additional customs costs later on, I would be better off giving up the UK and focusing on Eastern Europe instead.' This is the kind of strategic consideration that Brexit leads to for Dutch companies. Ultimately, it will lead to a lower degree of integration between the EU and UK economies'.

Preventing additional tax costs

Thoen says that the tax aspects of Brexit are underexposed, but at the same time he understands this. ‘Taxation is secondary, except for to tax advisers. The first point of concern for many of our clients is the supply chain. What should you do if your factory can no longer manufacture products because it cannot import goods? How do you ensure that the stocks will reach your British warehouse when the customs situation changes? These are key questions.’

Although it is not a top priority, Thoen certainly advises companies to analyse the tax situation in the extended period up until the end of October: 'What additional tax costs will the fact that the European directives no longer apply to the UK lead to? And how can you minimise the harmful effects by adjusting your legal structure? Ultimately, tax expenses always lead to higher prices for consumers. Decisions about direct taxes are therefore of direct relevance to the competitive position of companies.'

Include OECD-BEPS in adjustments

When analysing the structure and expenses, Thoen recommends taking into account the conclusions of the OECD Base Erosion and Profit Shifting (BEPS) project: 'With BEPS, the OECD ties in with the need felt in society for companies to pay taxes that are in line with the activities they carry out in a country. Now that companies are reconsidering their locations as a result of Brexit, the Netherlands is rapidly coming into the picture. For large companies with significant import and export activities, the Netherlands becomes a logical location for a broader function, such as a European head office or distribution centre.’

In addition to the tax aspects, Thoen also lists a number of other reasons why the Netherlands comes to the attention of clients. ‘We have a highly educated workforce, a pragmatic mindset, an efficient legal system, a stable government and a stable tax and financial system. And last but not least, we have the euro. Reason enough why I notice with international clients that our country is very popular.

Are your Brexit preparations in the area of direct tax not yet completed and would you like to benefit from our experience? Our team of experts is ready to advise you and your business. Don’t hesitate to contact us.

Contact us

Jan-Willem Thoen

Jan-Willem Thoen

Senior Director, PwC Netherlands

Tel: +31 (0)61 002 95 71

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