After the Withdrawal Agreement with the UK was voted down by British Parliament several times, the EU has allowed an extension until 31 October 2019. If no other arrangement with the EU will be made before that date, the UK will cease to be a member of the EU without any transitional measures in place (often referred to as a ‘hard Brexit’). Although the outcome of the process is still very uncertain, a hard Brexit scenario currently seems a likely scenario. Below we will discuss the most relevant tax consequences of such scenario.
Within the EU, there is free movement of people, goods and services. In a hard Brexit scenario, such free movement no longer applies as of 1 November 2019. As from that date, the UK is considered a non-EU country. This means that the ‘old borders’ revive. As a consequences, customs formalities need to be fulfilled, leading to additional costs and serious delays. Without a trade agreement, the UK is free to levy import duties and excise duties on goods imported from EU-countries, the same applies to goods imported from the UK in EU-countries.
Although the UK has announced that it will in principle continue to apply the current EU-based VAT system, the general expectation is that – over time, as a result of differences in future legislation and case law – differences between the UK system and the EU system will increase, which may lead to double taxation.
In respect of the movement of goods to or from the UK, such movement will no longer be classified as intra-EU transactions. The current rules for imports from non-EU countries will also apply to imports from the EU to the UK, which in principle means that VAT is due at the time the goods cross the border. This may have a negative cash flow impact for companies, as such VAT has to be reclaimed through the VAT returns filed. To avoid or reduce this effect, the UK have announced that VAT registered tax payers will have the opportunity to pay VAT due on imports through their VAT returns. In respect of parcels sent by overseas businesses, VAT will be due on goods entering the UK. The current UK exemption for EU parcels (Low Value Consignment Relief) will no longer apply.
As regards services provided, the UK leaving the EU may have an impact on the VAT place of supply rules, which determine where a service provided is VAT taxable and which may also have consequences on the entitlement to deduct input VAT.
As regards direct taxes (in particular corporate income tax) an important consequence of a hard Brexit is that EU-directives in the field of direct tax will no longer apply, without any transitional period. This effect may be softened by the fact that directives are also implemented through domestic legislation. In this context, the following EU-directives should be mentioned:
- Parent-subsidiary Directive. This Directive provides for a withholding tax exemption on dividend distributions to EU parent companies and double taxation relief (exemption or credit) at the level of the EU parent company for profit distributions from EU-subsidiaries. It will depend on domestic law and applicable tax treaties to what extent businesses will be confronted with higher taxes;
- EU Interest- and Royalty Directive. This Directive provides an exemption of withholding taxes on interest and royalty payments made between associated EU-resident companies. The UK levies withholding taxes on such payments, as do most EU-countries. The Netherlands does currently not levy such taxes, but is planning to introduce such taxes in certain situations in the coming years. It will depend on applicable tax treaties to what extent countries can exercise their domestic taxing rights.
- EU Tax Merger Directive. This Directive provides for a tax roll-over facility in respect of cross-border mergers and demergers.
- EU Anti-Tax Avoidance Directive (ATAD). This Directive prescribes that EU-countries should implement certain anti-tax avoidance measures in line with the OECD Base Erosion and Profit Shifting (BEPS) project. Since the scope of the OECD measures to a large extent resembles the EU measures, most measures are/will still in some form (be) implemented in UK law.
Other regulations such as the Transfer Pricing Arbitration Convention, State Aid rules etc. will also no longer apply.
For each individual situation it should be checked to what extent tax treaties and/or domestic legislation provide relief. If not, additional action may be required to avoid additional taxation.
Within the EU, social security is coordinated through an EU Regulation. This Regulation avoids double insurance and double insurance contribution obligations for EU-residents. After a hard Brexit, this Regulation no longer applies to the UK, as a result of which problems may arise. The Netherlands and the UK have concluded a social security treaty that is still in force. It should however be noted that the provisions of such treaty differ from the EU Regulation. An example may clarify this. Based on the Regulation, an employee of an EU-country who is seconded to another EU-country can remain insured in his EU-country of residence for a maximum period of five years. In the UK-Netherlands treaty, such period is limited to three years. Each individual situation should be checked to avoid unpleasant surprises.
By Robert de Vries