The impact of Brexit on businesses with international structures

It appears increasingly likely that there will be a hard, no-deal Brexit as of 1 January 2021. Regardless of the outcome of the negotiations, far-reaching consequences in the field of taxation are expected for Dutch businesses which operate in the United Kingdom (UK). It is therefore crucial that these businesses prepare for the end of the transitional period on 31 December 2020. In this article, we will discuss the most important tax consequences in this area. We will also flag a number of points of attention.

Brexit will impact withholding taxes, participation exemptions, international fiscal unities, mergers and divisions, and exit taxation. Our tax advisors are following the developments regarding Brexit closely, and have extensive expertise with regard to the tax consequences for companies which operate internationally. Please feel free to contact us, we would be happy to help you prepare for Brexit.

Withholding taxes

As a result of Brexit, the European Parent-Subsidiary Directive and the Interest and Royalties Directive will no longer apply to the UK. Currently, dividend payments received from participations in the European Union (EU), which meet the relevant requirements, are exempt from withholding tax under the Parent-Subsidiary Directive.

The Dutch dividend withholding tax includes an exemption for distributions to shareholders based in the EU or in a country with which the Netherlands has concluded a tax treaty, providing a number of conditions are met. Although the UK will remain a Dutch treaty partner after the transitional period, it is advisable to reassess the applicability of this exemption. The same may be true for interest and royalty payments to UK group companies, as the Netherlands will introduce a withholding tax on interest and royalties in 2021.

Action: Assess possible withholding taxation of dividend, interest and royalty payments to shareholders in the UK. Adjustments to multinational structures may be necessary.

Participation exemption

Brexit will not only affect Dutch subsidiary companies that perform dividend payments to UK-based shareholders. Dutch companies that receive dividend payments from UK-based subsidiaries will also be affected.

Under current Dutch law, received dividends are exempt from Dutch corporate income tax if the conditions for the participation exemption are met. Amongst other things, this means that the Dutch company must own at least 5% of the share capital of the subsidiary company which distributes the dividend. Even if the Dutch company owns less than 5% of the share capital, dividend distributions may, under certain circumstances, be exempt from corporate income tax.
For example, an exception applies if the Dutch entity holds at least 5% of the voting rights in a subsidiary company. In such a case, it is not the stake in the capital which is relevant, but rather the number of voting rights. However, this exception only applies with regard to countries that are part of the EU, and will therefore no longer apply to the UK after the transitional period. Consequently, these dividends will be subject to corporate income tax in the Netherlands.

Action: Assess dividend payments by UK-based subsidiary entities, with regard to the applicability of the participation exemption.

Cross-border fiscal unity

Dutch groups can currently form a fiscal unity between two subsidiaries in the Netherlands, if the shares are held by a parent company that is based in another EU Member State (the ‘top company’). Likewise, a Dutch parent company with an indirect interest in another Dutch company, held through an intermediate holding company in another EU Member State, can form a fiscal unity with that Dutch subsidiary.

Once the UK has left the EU, these types of group structures will no longer be possible. As a result of Brexit, fiscal unities with a top company or intermediate holding company based in the UK will end automatically as of the beginning of 2021.

Action: Reassess fiscal unities in group structures which include UK-based companies.

Cross-border mergers and divisions

Under Dutch tax law, it is possible to postpone taxation on profits realised as a result of a merger or division of companies established in the EU. The tax claim on these ‘silent reserves’ and capital gains is passed on to the new company (a ‘silent merger or division’), in line with the facility offered to mergers and divisions within the Netherlands.

However, under Dutch tax law, such a facilitated legal merger or division is not possible with a company outside of the EU. Once the UK has left the EU, this would include UK companies.

Action: If you intend to perform a cross-border merger or division involving both a UK-based and a Dutch company, or if you have performed such a merger or division in the last few years, reassess the consequences.

Exit taxation

When a business is moved to another country, corporate income tax is due with regard to unrealised capital gains and the silent reserves of the company (‘exit taxation’). It is possible to spread out the payment of this exit tax over a period of up to five years, if the company is relocated to another EU Member State. As a result of Brexit, the UK will no longer be an EU Member State, which means that it will no longer be possible to spread out the payment of the exit tax.

Action: If you intend to relocate a group company to the UK , or have done so recently, reassess the consequences.

Contact our experts

Our tax advisors follow the developments in international tax law closely. We would gladly advise you, if you have any questions about international structures. Please feel free to contact our advisors.