It will not have escaped anyone's attention that the Brexit also has consequences in the tax field. Since the levying of VAT and excise duties is harmonised and coordinated by Brussels, the Brexit will mainly affect indirect taxes. In conjunction with this, because of the existence of the customs union, the Brexit also has a major impact in the customs field. This has been frequently in the news.
For corporation tax and income tax, the consequences are less far-reaching, but nevertheless significant. Many provisions that apply to EU countries apply mutatis mutandis to EEA countries, but will not apply to the UK. Below, we will explain some of the salient consequences (not exhaustive) of the Brexit for corporate income tax, personal income tax, VAT and customs.
Corporation tax and income tax
Although direct taxation, including corporate taxation, is not harmonised within the EU, this does not mean that there are no regulations in this area that require a certain degree of harmonisation within the EU. Examples are the Parent-Subsidiary Directive, the Interest-Royalty Directive, the Merger Directive and the First and Second Anti-Avoidance Directives.
The Brexit means that the UK no longer has to comply with the obligations imposed on member states by these directives (e.g. the implementation of certain anti-abuse measures), but conversely this also means that UK residents are no longer entitled to the benefits of these directives (e.g. the avoidance of double taxation).
Not all protection has been eliminated
by the Brexit. In fact, the trade and cooperation agreement between the EU and the UK contains freedoms that appear to be similar to the traffic freedoms in the EU treaty. In addition, some VPB facilities may be attainable by relying on the free movement of capital for third countries. Customisation is required.
For example, the Parent-Subsidiary Directive provides, in short, that dividend payments from an EU subsidiary to an EU parent company may not be subject to withholding tax in the source state. This provision will no longer apply after the Brexit. For subsidiaries in the Netherlands that pay dividends to a parent company in the UK, the consequences of this will not be so great, because the Netherlands in principle also waives the levying of withholding tax on dividends if the acquiring company is a treaty state, which the UK is. However, we have identified that this may be problematic for other (source) countries. It is good to look at the group structure to identify possible consequences.
Merger, split-up and reorganisation
In the event of a reorganisation, the main rule is that the hidden reserves of the assets and goodwill of the company that is transferred must be paid. For the share merger, the company merger, the demerger and legal merger, however, there are facilities that, under certain circumstances, allow the tax claim to be carried forward. These facilities are included in both the corporate income tax and the personal income tax and are based on (or aligned with) the European Merger Directive. A cross-border legal merger or demerger is only fiscally assisted if the companies involved are based within the EU. Thus, no tax deferral can be obtained after the Brexit if a UK-based company is involved in a reorganisation.
The EC Court of Justice ruled in the past that the Netherlands may not make the formation of a fiscal unity conditional upon the companies involved being resident in the Netherlands. Following this case law, The Netherlands allows a fiscal unity to be formed between Dutch sister companies with a top company domiciled in the EU and between Dutch parent companies and sub-subsidiary companies with an intermediate company domiciled in the EU. If within a structure a top or intermediate company is established in the UK, the fiscal unity will be broken by the Brexit. Perhaps the aforementioned trade agreement still offers a possibility to claim a fiscal unity by invoking the non-discrimination clause. We advise not to just accept an automatic break of the fiscal unity as per 1-1-2021.
The main rule is that the participation exemption applies if at least 5% of the nominal paid-up capital is held in the participation. For the situation in which an interest of less than 5% is held, Article 13(3) of the VPB 1969 provides that if the state of incorporation of the company is within the EU and that state has concluded a double tax treaty with the Netherlands which provides for a reduction of taxation on dividends based on the number of voting rights, a participation can still exist if the shares represent at least 5% of the voting rights. This relaxation no longer applies to the Dutch shareholder in respect of participations held in the UK.
Companies established in the Netherlands that transfer their tax domicile abroad must, in principle, pay tax on the capital gains that have not yet been reflected in taxation and therefore remain untaxed. If the company transfers its registered office to another EU country, there is a deferral option. In this case, the payment is spread over five equal annual instalments. In the case of a transfer to the UK, the deferral option no longer exists.
A similar rule applies to natural persons with a substantial interest. If the substantial interest holder moves within the EU, settlement is postponed until the moment of realisation of the benefit, whereby the submission of a request and the provision of security are not mandatory. The entrepreneur in the income tax or the recipient of a profit can opt for immediate settlement, for settlement at the time of realisation of the benefit, or for spread payment in ten equal annual instalments.
Qualifying foreign taxpayer
A resident of another member state of the EU/EEA, Switzerland or the BES Islands whose income is for 90% or more subject to wage tax or income tax in the Netherlands and who can submit an income statement from the tax authority of his or her country of residence, will be entitled to the same deductions and tax credits as residents of the Netherlands, such as the mortgage interest deduction and the personal deductions. A UK resident will no longer be eligible for this scheme. However, for taxpayers who in 2020 met the conditions for qualifying foreign tax liability, transitional law has been provided.
There are many more regulations under which activities or shareholders in the EU are equated with Dutch activities and shareholders. Think of the so-called research and development activities (under the WBSO), but also for example shareholder requirements in the tax treaty with for example the United States of America. Even for the so-called DAC-6 or Mandatory Disclosure Rules, there are differences now that the UK has changed the rules after Brexit (see our post UK -Brexit& DAC6: a marriage doomedtofail?(twobirds.com)).
Check for each scheme whether it is EU-specific or possibly also applies in relation to third countries. If the scheme or facility is related to the free movement of capital or freedom of establishment, nothing may change.
We recommend you to present your specific structure and activities to your tax expert. If desired, we would be happy to have an exploratory meeting, free of obligation, to discuss matters.
VAT and customs
On 24 December 2020, the EU and the UK concluded an agreement in which they agreed on the rules that have applied since 1 January this year. Among other things, the agreement agreed that goods of preferential origin could be imported from the UK or the EU free of import duties.
For VAT purposes, the Brexit means that transactions with the UK are no longer intra-community transactions. Goods from the UK must be imported into the EU since the Brexit. Therefore, when importing goods from the UK, an import declaration is filed with customs. Based on the customs value, the applicable VAT is calculated. The seller of the goods from the UK does not mention VAT on the invoice.
The payment of VAT at customs can be avoided by applying for an Article 23 authorisation under which VAT need not be paid at customs but can be declared in the VAT return.
The export of goods from the EU to the UK is also no longer an intra-Community transaction, but a supply to a country outside the EU. When exporting, the reverse situation applies and the European supplier does not mention VAT on the invoice. The UK levies the VAT. However, with an Incoterm® Delivered Duty Paid (DDP) the supplier is obliged to pay the import duties and import VAT.
When services are supplied to the UK, the main rule is that the service is taxed in the country of the customer. Therefore, no VAT is charged by the EU-based service provider. If a UK service provider supplies services to a European customer, the VAT is usually shifted to the European customer. In some situations, the UK service provider is unable to reverse charge the VAT and the UK VAT is paid by the EU customer.
For the tax treatment of goods, Northern Ireland is treated as an EU Member State. For services, this special status does not apply and Northern Ireland is not treated as an EU Member State.