Worldwide: 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.

The first step toward ameliorating this situation would be to seek relief under a double tax treaty in existence between the UK and the EU jurisdiction concerned, and to ascertain whether this relieves the imposition of withholding tax on such cash flows. These treaties are intergovernmental agreements which are already in existence and will not be impacted by the changes relating to Brexit.

It should be remembered, however, that even if a potentially helpful tax treaty is in place, typically a number of additional conditions would need to be satisfied for the tax treaty exemption to be available as a matter of practice. Each situation would need to be considered on the basis of the applicable facts.

The "Limitation of Benefits" Clause in US Tax Treaties

This separate issue also arises as a result of the UK's loss of its status as an EU member state. As background, tax treaties between the US and EU countries tend to include a requirement that the EU resident party satisfies a "limitation of benefits" test to qualify for the benefits under the treaty. To qualify under the EU portion of the test, the EU party must qualify under one of several specified categories of persons. One typical category is that the EU party is itself owned by another EU company (an EU parent). Currently, a UK company can qualify as such an EU parent. Post-Brexit, however, this will no longer be the case, as Brexit involves the UK's ceasing to be an EU member state.

Take the specific example of a lending transaction where a US borrower pays interest to a Luxembourg resident lender. The US-Luxembourg double tax treaty eliminates US withholding on the related interest payments. The Luxembourg lender will only be entitled to the benefit of that treaty exemption from US withholding, however, if it qualifies under the limitation of benefits test in the applicable tax treaty. If the Luxembourg lender is relying on the fact that it is owned by a UK company which currently qualifies as an EU parent, then, post-Brexit, this will no longer apply.

What does this mean in practice? It means that post-Brexit, absent satisfying any other of the limitation of benefits tests, the Luxembourg lender would no longer be entitled to the benefits of the treaty, and the interest paid by the US borrower may become subject to US withholding. Depending on the contractual arrangements (the drafting of the loan documentation), the US borrower may be required to compensate the lender for the cost of that withholding (in other words, a gross-up under a tax indemnity), and so this aspect of Brexit could ultimately be directly relevant to US taxpayers involved in similar transactions.

With the date of Brexit rapidly approaching, US companies should consider the potential impact Brexit could have on their current and future transactions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Country
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions