No-Deal Brexit: changes to withholding taxes

UK businesses receiving payments from the EU have some planning to do…

It has long been the case that interest, royalties or dividends paid to someone in another country might be subject to a withholding tax (“WHT”) by the payer. The tax treaty between those two countries will set out the rate to be withheld and what the conditions might be to reduce or remove the WHT deduction.

For members of the European Union, there are two significant Directives that mean companies do not have to even consider WHT on these payments. The Parent Subsidiary Directive and the Interest and Royalties Directive mean that for many years EU resident businesses have not had to rely on their tax treaties for WHT relief. It is automatically given if payer and recipient are EU resident.

From 1 January 2021, this will change but it is complicated. UK payers may not see many differences, but a UK business receiving payments from the EU almost certainly has some planning to do.

UK business paying interest or royalties to an EU resident business

We have mentioned in earlier articles that the UK has prepared for Brexit by adopting large parts of existing EU law into its domestic rules. After the end of the transition period, these EU laws will become UK laws until the UK decides to amend them. In respect of the Interest and Royalties Directive this produces an interesting outcome; the legislation is worded in such a way that payments by UK resident business to the EU will continue to be exempt from WHT. It seems unlikely that this was intentional, but the UK Government is aware of it and has not said it sees this as a priority. For now, it seems that the exemption continues in respect of payments by UK companies.

UK subsidiary paying dividends to an EU resident Parent

The approach taken in respect of interest and royalties by the UK Government is perhaps not that surprising. The UK already has domestic legislation that exempts dividends from WHT. From 1 January 2021 this existing exemption will replace the Parent Subsidiary Directive meaning that payments to EU resident Parent companies will continue to be exempt from WHT.

UK business receiving interest or royalties from an EU resident business

From 1 January 2021, some EU member states may start to deduct tax from interest and royalty payments made into the UK, which used to be exempt. The amount of tax deducted will depend on the double taxation agreement between the UK and the EU member state. In some cases, it will be possible to apply for a full or partial exemption from WHT or to offset the WHT against your UK taxes, but not always. Businesses that think they might be in this category should review their income and perform a country-by-country review of the WHT rate applicable and any exemption or reduction procedure.

A summary of the interest and royalty WHT rates for the main EU countries is below:

Country

Main rate of interest WHT

Main rate of royalty WHT

Belgium

10%

Exempt

Denmark

Exempt

Exempt

France

Exempt

Exempt

Germany

Exempt

Exempt

Ireland

Exempt

Exempt

Italy

10%

8%

Netherlands

Exempt

Exempt

Portugal

10%

5%

Spain

Exempt

Exempt

Sweden

Exempt

Exempt

UK business receiving dividends from an EU resident company

From 1 January 2021, some EU member states may start to deduct tax from dividend payments made into the UK, which used to be exempt. The amount of tax deducted will depend on the double taxation agreement between the UK and the EU member state. In some cases, it will be possible to apply for a reduced WHT rate or exemption from WHT. Businesses that think they might be in this category should review their income and perform a country-by-country review of the WHT rate applicable and any exemption or reduction procedure.

Any WHT suffered on dividend receipts is difficult to reclaim. If the dividend is taxable income for the UK company then some relief might be possible. The UK, however, exempts most dividend income from corporation tax and for these dividends, there is no way to claim relief for WHT.

A summary of the dividend WHT rates for the main EU countries is below:

Country

Main rate of dividend WHT

Minimum holding for reduced WHT rate

Reduced WHT rate

Belgium

10%

10%

Exempt

Denmark

15%

25%

Exempt

France

15%

10%

Exempt

Germany

15%

10%

5%

Ireland

15%

10%

5%

Italy

15%

10%

5%

Netherlands

10%

10%

Exempt

Portugal

15%

25%

10%

Spain

10%

10%

Exempt

Sweden

5%

10%

Exempt

Most EU countries have lower dividend WHT rates for pension schemes and higher rates for real estate investment trusts (REITs), but this is beyond the scope of this article.

For more information on withholding taxes or how Brexit might impact the tax affairs of your business, please contact:

Jamie Richardson
Partner
Tel: +44 (0)20 7430 5889
Email: jrichardson@fitzandlaw.com

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