With regard to direct tax, Brexit will mainly have tax-related consequences for stipulations regulated by the Treaty on the Functioning of the European Union (“TEU”) and the European directives.
Although arrangements on corporate tax implications of Brexit are included in the Free Trade And Cooperation Agreement (“FTCA”), they primarily address (unfair tax) competition and ensuring a level playing field for open and fair competition between the parties to ensure that trade and investment take place in a manner conducive to sustainable development.
Treaty on the Functioning of the European Union
The TEU covers among others the fundamental freedom of establishment (article 49 TEU), the free movement of capital (article 63 TEU) and state-aid rules (article 107 TEU).
In principle, the TEU and related case law of the European Court of Justice will no longer apply to the UK. Note that this does not apply to the free movement of capital (including related case law), since article 63 of the TEU also applies to the movement of capital between Member States and third countries.
The FTCA introduces a subsidy control mechanism ensuring that the granting of a subsidy (including tax benefit/measures) respects certain minimum standards. These standards draw severely from EU state aid principles.
Furthermore, the FTCA includes a most favoured nation treatment for investors and services. When investing in the other Party’s territory, UK/EU investors shall not be treated less favourable compared to the treatment of third country investors in similar situations with respect to the establishment or operation of an enterprise in its territory. Equally, UK/EU services and service suppliers shall not be treated less favourable compared to the treatment of third country services and service suppliers.
However, the FTCA explicitly states that this most favoured nation treatment does not cover the benefit of any treatment resulting from an international agreement for the avoidance of double taxation or other international agreement or arrangement relating wholly or mainly to taxation.
These provision should prevent the UK from (re)introduce favourable tax regimes and/or favouring domestic industries post Brexit.
The goal of these directives is to avoid double taxation in a European context.
The following EU Directives will cease to apply in relation to the UK as a "third party":
- Parent-Subsidiary Directive
- Interest and Royalty Directive
- Merger Directive
The Parent-Subsidiary Directive allows an exemption of withholding tax at source on dividends distributed between EU companies. Dividends received are also exempt from taxation at the level of the parent company if the equity interest in the subsidiary is at least 10% over a minimum period of 1 year.
The fact that the Parent-Subsidiary Directive will no longer apply after Brexit, will have an impact on these favourable tax measures for dividend payments. Subsidiaries may no longer be able to distribute dividends free of withholding tax and parent companies might become taxable on dividends received. British national legislation, however, currently does not provide for withholding tax on dividend distributions.
This implies that when a British subsidiary pays a dividend to a Belgian parent company, this dividend remains exempt from British withholding tax. It remains to be seen whether the United Kingdom will adapt this legislation. Conversely, when a Belgian subsidiary pays a dividend to its British parent company, the exemption from Belgian withholding tax will, in principle, remain applicable because Belgium has extended the withholding tax exemption to include all countries it has concluded a double taxation agreement with, provided the minimum holding period and minimum participation conditions have been met. UK source dividends will normally also continue to qualify for a (100%) corporate tax exemption for the Belgian parent.
Interest and Royalties
The European Interest and Royalties Directive provides for a withholding tax exemption on royalties and interest if the participation (direct or indirect) equals at least 25% during a minimum period of 1 year. As a consequence of Brexit, interest and royalties might become subject withholding tax at source.
The British withholding tax exemption will remain applicable for interest and royalty payments by a British to a EU company on condition that the current conversion of these directives in the United Kingdom’s national legislation remains unchanged.
If it is adapted, a reduction to or exemption from British withholding tax (currently 20% on interest and royalties) should be claimed based on the double taxation agreement. Interest or royalties that are paid by a Belgian to a British company, can no longer benefit from the exemption of Belgian withholding tax, as this exemption only applies to companies registered in the EU.
Based on the double taxation agreement between the UK and Belgium a lower withholding tax of 10% or 0% (in specific circumstances) applies for interest payments. An exemption from withholding tax on royalty payments is applicable based on the agreement. Recent and future development in relation to the Multilateral Instrument which generally strengthened the conditions for treaty benefit entitlement, should also be considered, as both the UK and Belgium have considered the double taxation agreement as a Covered Tax Agreement.
Where withholding tax is likely to be payable on cross-border payments within your group after Brexit, consider bringing forward loan interest/capital payments and royalty payments to benefit from existing rules.
The Merger Directive provides for common taxation regulations for mergers, demergers (including partial demergers), transfers of assets and exchanges of shares. Brexit may negatively affect reorganisations. The actual effect will depend on domestic law and the double taxation agreements in place.
For incoming transactions (from the United Kingdom to Belgium), in principle, nothing will change as long as the United Kingdom’s national legislation remains unchanged.
For outgoing transactions (from Belgium to the United Kingdom), the exemption from exit tax on capital gains will, in principle, no longer be applicable. The tax-neutral regime in Belgium only applies to interactions with intra-European companies (companies registered in the member states of the European Union).
Good governance and taxation standards
In order to avoid using taxation to distort competition, the FTCA includes a specific chapter on taxation (Heading One, Part Two, Chapter V, Title XI,), containing provisions relating to good governance and taxation standard.
With regard to good governance, the parties commit to implement the principle of good governance in the field of taxation, in particular with regard to global standards on tax transparency and also exchange of information and fair tax competition. They undertake to implement the OECD standard principles against base erosion and profit shifting ('BEPS').
Regarding minimum taxation standards, the parties shall, at the end of the transition period, i.e. on 31 December 2020, not reduce their provisions in their legislation below the level provided for by the standards and rules which have been agreed in the OECD and the standard rules of the OECD model, which relate to:
- Exchange of information concerning financial accounts, cross-border tax rulings (BEPS action 5), country-by-country reports between tax administrations (BEPS action 13), and potential cross-border tax planning arrangements (BEPS action 12),
- Interest deduction limitation rules (BEPS Action 4)
- Controlled foreign companies (BEPS action 3)
- Hybrids mismatch (BEPS action 2)
EU Mandatory Disclosure Regime (DAC 6)
Those familiar with the EU Mandatory Disclosure Regime (commonly referred to as DAC 6) probably know that an intermediary can be released from his reporting obligation if the required information has been reported in another Member State (and proof of such reporting can be provided).
On the basis of minimum taxation standards provision in the FTCA, the UK tax authorities immediately (on 31 December 2020, i.e. on the eve of the rules taking effect) confirmed that the UK would repeal the existing law on DAC 6 and replace it with rules implementing the less strict OECD rules on tax transparency. Only arrangements designed to undermine tax reporting under the common reporting standard and transparency rules are reportable under the OECD standard. For more information in this respect, we refer to the newsflash released by our UK colleagues. For DAC 6 related insights we refer to the articles published earlier by BDO Belgium on this matter:
DAC6 cancellation and replacement with OECD rules
How is Belgium interpreting the European DAC6 directive?
Managing your DAC6 obligations
Obligation to report cross-border tax arrangements as from 1 July 2020
Considering that both the EU Directive and the Belgian transposition law explicitly reserve the exemption for EU Member States only (with the UK no longer being considered an EU Member State as from 1-1-2021) and provided the reporting in the other Member State contains the relevant information required under Belgian legislation (which the UK reporting will not), we consider it highly unlikely that a Belgian intermediary will be released from its reporting obligation based on a report filed in the UK as from 1 January 2021.
Personal income tax treatment of cross-border income
EU legislation is not the main source of law to determine the personal income tax treatment of cross-border income. The personal income tax consequences are primarily governed by bilateral treaties which remain unaffected by a no-deal Brexit or Brexit with a new Trade Deal. In case of a no-deal Brexit, however, UK residents will no longer be protected by the non-discrimination provisions included in EU legislation and may therefore lose some tax benefits that are granted to Belgian and EU residents.
Other legislation remains unchanged
According to international regulations, European law, from which the rights and duties of EU citizens derive, has priority over other legislation and bilateral agreements. Most of the EU legislation has, been transposed into British national law. The double taxation agreement between Belgium and the United Kingdom also remains applicable. Companies can also reap tax benefits in an international context from this, which may limit the impact of the United Kingdom’s exit from the EU.