End of Brexit transition and withholding tax
Following the end of Brexit transition on 31 December 2020, and unless part of a free trade agreement, in principle, EU affiliates will no longer be able to rely on the provisions of the EU Parent Subsidiary and Interest and Royalties directives to make payments to and from UK companies free of withholding taxes.
The UK’s extensive network of double tax treaties will not be affected by Brexit and, in many cases, will also provide relief from withholding taxes that might otherwise be imposed.
However, not all treaties provide for 0% withholding taxes. For example, the UK Italy Treaty imposes a 5% withholding tax on dividends and an 8% withholding tax on interest provided certain conditions are met with respect to payer and recipient. Conversely, 0% can be achieved in relation to France provided all the conditions of the UK France treaty are met.
Unfortunately, it becomes even more confusing since, although the UK has the right to charge a withholding tax on dividends in certain tax treaties, generally the UK does not impose withholding on payments made by UK companies, although other countries do not enjoy those the same rules.
Furthermore, practical arrangements and permissions for claiming treaty relief may need to be revisited before any payments are made or received post Brexit transition to benefit from these treaty rates. To put it bluntly – it may require more paperwork.
To manage the situation we recommend companies consider the following actions before arranging for receipt or payment of dividends interest and royalties with EU countries post Brexit transition:
- Review and identify existing dividends, interest and royalties that are being paid cross border with the EU.
- Consider what the double tax treaty position will be, the treaty applications already in place and what new treaty forms are required to enable payments to be made with the benefit of the treaty rate.
- Review the wider group structure to assess whether it may be necessary to reorganise the EU group.
Should you wish to discuss your withholding tax position further, please call your regular MHA Tait Walker tax contact or one of our specialists listed below: