The opening panel of the London event on June 28 looked at the post-Brexit tax system with a discussion between Anneliese Dodds, MP for Oxford East; Erika Jupe, partner at Osborne Clarke; and Kelly Stricklin-Coutinho, barrister at 39 Essex Chambers.
Much of the national tax conversation has focused on Brexit’s impact on customs and VAT, yet the potential fallout for UK-based holding structures has been absent from the mainstream debate. The UK has long been an attractive location for holding structures because there is no withholding tax on dividends and there are generous exemptions for foreign dividends and overseas branch profits.
The UK’s withdrawal from the EU may mean new exit charge rules for moving companies between EU jurisdictions and the UK, while the loss of key directives could make the UK much less competitive than countries like the Netherlands and Luxembourg.
“There has not been any mention of the impact of Brexit on [holding structures], probably because it’s not the main political concern,” one panellist said. “But we enjoy a number of EU benefits for holding companies.”
“If we aren’t able to rely on EU directives, we are likely to see a tailing off of the UK as a holding company jurisdiction,” the panellist explained.
The EU Savings Directive, the Mergers Directive and the Parent-Subsidiary Directive are a crucial part of how the union allows businesses to set up shop in different jurisdictions. When these provisions no longer apply to the UK, it could create sudden barriers when trying to enter the UK.
Suze McDonald, international tax partner at RSM UK, told ITR that the UK’s withdrawal from the EU is a major concern for holding companies.
“When the UK exits the EU, businesses with UK holding companies will have to consider the impact of withholding taxes in the absence of such directives, whether this will be an absolute cost and what restructuring may need to be done, to reduce or mitigate the burden of any withholding tax, that may now be in point, under the relevant double tax treaty,” McDonald said.
Turning to tax agreements
Once outside the EU, the UK would have to forge some kind of alignment of its own tax laws to avoid an economic slump, and yet there’s little sign of a final deal at this stage. This is after a slowdown in M&A and the pound losing its past strength.
“After the referendum, you saw a dip in M&A because the currency dropped in value and UK companies want good value,” one panellist noted at the forum.
On the other hand, British businesses will be able to fall back on the existing double tax agreement (DTA) framework, but there are problems with this option. While the UK has an extensive network of tax treaties, the country would still be in an unfamiliar situation once it leaves the EU. Not all tax treaties are created equal and the terms vary dramatically.
The panel noted the example of the UK-Germany tax treaty, which only covers 5% of the gross amount of the dividends in cases where the beneficial owner holds at least 10% of the capital. The rule is 15% for all cases, except for pension funds which get 10%. This may mean UK-based companies could face higher withholding rates, especially in a ‘no-deal’ scenario with the EU.
Opportunities in crisis
Since the EU’s state aid cases have hit major companies like Apple and Amazon, the UK has become a much more attractive destination for holding companies over its European rivals like the Netherlands and Luxembourg.
“Reputational risk and brand risk are right up there at the top of the agenda for most multinationals today,” McDonald said. “The widely publicised decisions by the European Commission will make other shareholders and investors consider a wider set of comparables when choosing a location, other than simply tax attributes.”
Not long ago it was plausible that the Netherlands and Luxembourg would be able to make the best of Brexit, staking out a much bigger claim on the market for holding structures. But both countries may be on the losing side of the EU’s anti-tax avoidance agenda.
ITR spoke to the head of tax at a London law firm, who stressed that Dutch and Luxembourg advisers would play down the role of state aid investigations.
“The BEPS reports by the OECD, reviewing the framework for taxing international business and the adoption by the EU of two anti-tax avoidance directives [ATADs], are having an impact,” the partner said.
“The increased requirements for substance and the anti-hybrid rules have had an impact on certain Dutch structures, the well-used CV-BV structure, and the Luxembourg CPECS which enabled dividends to be paid out without withholding tax,” the partner added. “But Luxembourg is still very popular for pan-European funds.”
McDonald’s has already moved its international tax base to the UK following its run-in with the European Commission. The US fast-food company was quick to overhaul its arrangements in Luxembourg in favour of new structures in Delaware and London.
This is why observers are divided over whether the UK will lose out. The UK could try to position itself as a low-tax jurisdiction off the coast of the EU and draw in controlled foreign companies (CFCs). Being outside the EU might be an advantage in the long-term, but who exactly benefits is the real question.
“The UK leaving the EU has brought up the possibility of greater tax competition and that’s not been positively received in the EU because it’s another starting shot in the race to the bottom,” one panellist said. “This is how the UK could undercut EU tax rates and regulation.”
“There is real potential for the UK to become a CFC jurisdiction of other countries,” another panellist said. “Yet we’ve spent so long condemning such jurisdictions for ‘nicking’ our profits.”
“We may move from the UK being concerned with low-tax jurisdictions in the EU to trying to compete with them,” she added.
As the UK gets ever closer to the March 2019 deadline (although a transitional deal preserving its EU membership perks for another year or two will almost certainly be agreed) EU member states are considering their own options. The Netherlands and Luxembourg are rethinking tax policy, particularly when it comes to permanent establishment rules and withholding tax.
The discussion at the forum highlighted how interconnected every factor is in Brexit. It’s not just that the UK will define its fiscal strategy in a world where everything else stays the same, but every shift will prompt a reaction from formers partners in the EU.
