Brexit requires a reassessment of your direct tax position

Important points for attention from 2021

A possible trade agreement between the EU and the UK post Brexit is expected to have little or no influence on direct taxes. In this article Jan-Willem Thoen, head of the Brexit Desk at PwC Netherlands, reflects on the main points of attention after the end of the transition period on 31 December 2020. While doing so, he discusses the measures you can take to limit the negative consequences of Brexit on your direct tax position.

Ending of papillon and sister fiscal unities

Following European case law, the Dutch legislator has opened up the Dutch fiscal unity regime for Dutch tax resident companies whereby either (1) an EU or EEA tax resident company is an intermediate holding company (i.e. a Papillon Dutch fiscal unity) or (2) the Dutch companies are qualifying owned by the same EU or EEA tax resident company (i.e. a sister Dutch fiscal unity). After the transition period ends, UK tax resident companies will no longer be tax resident in an EU or EEA country. As a result the conditions for a papillon and/or sister Dutch fiscal unity can no longer be met. Consequently, the Papillon or sister Dutch fiscal unity will cease to exist per 31 December 2020. Thoen warns: 'Besides additional compliance obligations for the companies no longer included in the Dutch fiscal unity, this could trigger anti-abuse legislation and for example transfer pricing obligations. You can prevent these consequences by amending your group structure before the end of the transition period to ensure you are meeting the requirements of a normal Dutch fiscal unity.'

From a beneficial EU system to individual tax treaties

Due to the absence of domestic dividend withholding tax and the introduction of other favorable regimes, the UK had developed itself as a prime location for (regional) head offices over the years. For incoming dividends (i.e. dividends received by the UK holding company from EU countries), in a lot of cases the local implementation of the EU Parent/Subsidiary Directive is used to reduce the dividend withholding tax in the distributing country to zero. 'In a lot of these local cases reference is made to a beneficial owner recipient tax resident in an EU or EEA country', says Thoen. 'After the end of the transition period, companies with a UK shareholder will no longer have access to this favourable EU system. They will need to fall back on the concluded tax treaty with the UK. This means for example that withholding tax will be due on payments from the following EU countries to the UK: Austria, Croatia, Czech Republic, Germany, Greece, Italy, Lithuania, Luxembourg, Portugal and Romania. You could avoid these consequences by using the Netherlands as a central mainland Europe holding company as the Netherlands and the UK have concluded a tax treaty with zero withholding tax in most situations. Obviously this would also need to fit in your operational organisation.'

Cross border mergers

Under Dutch legislation, it is possible to implement a cross border merger between a Dutch tax resident company and a company tax resident of an EU or EEA country, whereby roll-over relief can be claimed if conditions have been met. 'After the transition period ends, UK established companies are no longer tax resident in an EU or EEA country', Thoen notes. 'Cross border mergers with UK tax resident companies will therefore no longer be covered by the roll-over relief clause.' Unfortunately, the remaining period is now too short to implement cross border mergers before the end of the transition period. In some cases, you must therefore use other means - such as liquidations or transfer of seats - for cross-border reorganisations. For current merger procedures, the UK has already announced that all cross-border mergers involving a UK company must be fully completed by 1 January 2021.

LOB provision application

Various tax treaties concluded between countries include Limitation of Benefits provisions ('LOB provisions'). In some cases, these LOB-provisions require a group to be listed on a recognised stock exchange for a group to be able to pass the LOB provision requirements. 'Such a recognised stock exchange is often defined as being an EU stock exchange', Thoen clarifies. 'After the end of the transition period, the London stock exchange is no longer a stock exchange within the EU and will no longer be a recognised stock exchange. A consequence of this is that you will face increased taxation on, for example, interest, royalties and dividends. Amending your corporate structure in time could mitigate these adverse consequences.'

Application of Court of Justice EU case law

Over the years, the European Court of Justice EU (ECJ) has issued case law related to cross border direct tax. This includes for example case law on the importation of definite losses, the access of permanent establishments to tax treaties with third countries and the legal recognition of foreign entities. 'After the end of the transition period, the ECJ will lose its competence in relation to the UK', says Thoen. 'Claims relating to the direct effect of case law of the ECJ will therefore no longer be honored. Mapping the possible consequences in this area can help you determine whether there are alternatives to mitigate the negative consequences.'

DAC6

The European Union has introduced a reporting obligation with a new Directive on Administrative Cooperation (DAC6). The first reporting in the Netherlands must take place from 1 January 2021, but relate to the period from 25 June 2018. 'In cases where reporting is already filed in another country, it is sufficient to record this. The notification requirement will then lapse', Thoen notes. 'Both the Netherlands and the UK have implemented the relevant Directive. However, reporting in the UK will no longer lead to an exemption from reporting in the Netherlands as from 1 January 2021. In some cases you will therefore have to report twice. The current negotiations between the UK and the EU may offer a solution, but there is not yet one. So you have to map out which DAC6 reporting you will need to make and in which countries.'

Join our webcast

As part of our State of Tax webcast series we will organise the webcast 'Ready for Brexit' on Wednesday 2 December. In this session Brexit experts from PwC will update you on the required preparations in key Brexit areas of trade & goods, tax, legal and people. Sign up here.