What Are The Tax Impacts Of Brexit?

Brexit—the formal departure of the United Kingdom (the UK) from the European Union (the EU), pursuant to the referendum held in the UK in June 2016—is imminent: the UK will cease to be a member of the EU on March 29, 2019. In addition to the significant political and economic uncertainty currently being experienced by the UK in the run-up to Brexit, Brexit also creates some real-world and potentially significant tax issues for a variety of cross-border legal structures. Although Brexit should not generally have any direct impact on US taxpayers, it could impact structures and transactions in which US taxpayers participate. This client alert outlines two ways in which US taxpayers with interests in the EU could be affected.

Payments Between EU Companies

A US entity with EU subsidiaries (including under current law in the UK) could face an impact from Brexit. Specifically, payments of dividends, royalties or interest made by a subsidiary located in one EU state to a parent company located in another EU state are exempt from withholding taxes imposed by the state of the payer. The level of ownership required is in fact low: the ownership relationship required between payer and recipient is only 25 percent.

This changes post-Brexit. Following the enactment of Brexit, the UK will no longer be an EU state. Accordingly, UK companies will no longer qualify for this intra-EU withholding exemption. Consequently Brexit could have a material impact on any current transaction structure—or corporate group—where a UK company receives payments of dividends, royalties or interest from a previously qualifying subsidiary in the EU.

Take a specific example of a hypothetical US-headquartered multinational corporation with subsidiaries in the UK and other EU countries:

If the French, German or Italian subsidiary pays dividends, royalties or interest to the UK parent, under the exception to withholding described above, France, Germany and Italy would not impose any withholding tax on those payments.

Post-Brexit, this will no longer be the case. Instead, payments to the UK company could be subject to withholding on payments originating from the related companies in France, Germany or Italy. A tax credit might be available in the UK which would reduce the impact of any such withholding, but if the UK company has no tax liability (because, for example, the receipt of the dividend is exempt from tax in the UK) then such credit will be of no practical benefit.

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