Italy: Brexit: potential consequences on the tax relations between the UK and Italy

Nicola Saccardo	Gabriele Colombaioni

The terms and conditions of the withdrawal of the UK from the EU have to be negotiated according to the procedure laid down by Article 50 of the Treaty on European Union. In the meantime, however, it is worth highlighting some of the main tax consequences, which may derive from the withdrawal, such as the impact on relationships between the UK and Italy.

In terms of primary EU law, the UK's withdrawal will imply the non-application of the fundamental EU freedoms, with the exception of the free movement of capital, which applies to third countries (i.e. non-EU member states). Therefore, UK companies setting up subsidiaries or branches in Italy will no longer be protected from discriminations in Italy pursuant to the EU freedom of establishment. Furthermore, the UK won't be bound by the state aid ban under Art. 107 of the Treaty on the Functioning of the European Union (TFEU Treaty).

The withdrawal will also impact EU secondary law. Indeed, the tax directives (including the Parent-Subsidiary Directive, the Interest and Royalty Directive, the Merger Directive, the Directive on exchange of information and assistance in the recovery of tax claims, the VAT Directives and the Anti-tax Avoidance Directive) will cease to apply to relations between Italy (and other EU member states) and the UK. For example, as a consequence, UK resident companies will no longer benefit from the withholding tax exemptions by the Parent-Subsidiary Directive and the Interest and Royalty Directive. Therefore, dividends, interest and royalties paid by Italian companies to UK companies will become subject to withholding tax at the domestic tax rate, as reduced by the UK-Italy tax treaty (and, possibly, by the free movement of capital).

The UK's withdrawal will further imply that so-called European soft legislation (codes of conduct, recommendations, communications, etc.) will not be applicable to UK anymore. Likewise, it will not bind EU member states to the extent that such soft legislation is meant to regulate dealings between member states. For instance, the code of conduct for the effective implementation of the Arbitration Convention and the European Commission recommendation of January 28 2016 on the implementation of measures against tax treaty abuse (part of the Anti-Tax Avoidance Package presented in January by the European Commission) will not be applicable to the UK anymore.

Finally, regarding Italian domestic law, the withdrawal could adversely affect, among others, the taxation of outbound payments sourced in Italy. Indeed, over the past few years, Italy has introduced several favourable withholding tax regimes applicable in the relations with EU member states, including:

• The reduced domestic withholding tax (1.375%, instead of 26%) on outbound dividends paid to entities that are resident of an EU member state and subject to corporate income tax therein;

• The reduced domestic withholding tax (11%, instead of 26%) on outbound dividends paid to pension funds set up in an EU member state;

• The exemption from withholding tax on outbound interest paid on bonds issued by companies with shares or bonds traded on a regulated market or multilateral trading system of an EU member state; and

• The reduced 5% withholding tax on outbound interest available to the recipient to fund the payment of interest on qualifying bonds traded on a regulated market of an EU member state.

Nicola Saccardo (n.saccardo@maisto.it) and Gabriele Colombaioni (g.colombaioni@maisto.it)

Maisto e Associati

Tel: +44 207 3740 299 and +44 207 3740 299

Website: www.maisto.it