On June 24 the British people voted in favour of the UK leaving the EU. The vote itself does not automatically imply the withdrawal from the EU and, according to the majority of the analysts the process will be quite long.
Among various scenarios already commented by journalist in the past days, a suggestive horizon is the one of a specific negotiation with EU, not necessarily calling for article 50 of the Treaty.
Anyhow terms and timing of the UK withdrawal from the EU is difficult to be forecasted and therefore we need to address the tax&legal issues within an uncertain environment.
On July 13 Mrs Theresa May has been appointed British Prime Minister and new Secretaries have been nominated. The UK is therefore going to have soon the impact of the new Government, which, among other peculiarities, nominated a new Secretary for negotiating the “Brexit” with the EU.
EU law is going to impact UK for the time being, but it is of utmost importance – in particular for corporate entities and investors – to check any possible outcome from the referendum.
The EU law impact can be divided among:
- EU Treaty fundamental freedoms;
- EU regulations and directives;
- EU “soft” legislations.
The EU fundamental freedoms laid down in the EU Treaty will no longer apply. Domestic legislation and International treaties and convention will be the applicable set of rules.
Free movement of capital will be alive, but outside the EU legal framework, this implies e.g. that UK companies setting up subsidiaries or branches in Italy will be protected on the basis of article 5 of the Convention between the United Kingdom and Northern Ireland and the Italian Republic for the avoidance of double taxation, signed on, October, 22th 1988 (hereinafter, only “the Treaty”) and not pursuant to the EU freedom of establishment.
UK will have no (EU) consequences when (and if) State Aid will occur.
Concerning EU regulations and directives the impact will be deep.
The “Parent-Subsidiary” Directive will not be applicable anymore. Therefore, remedies for double taxation will be called only on the basis of the applicable tax Treaty. A UK company will not qualify anymore within the meaning of the directive. Dividends paid out from Italy towards UK will be taxed with a withholding tax, which, according to the treaty, will be taxed as following (article 10 of the Treaty):
- Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.
- However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: (a) 5% of the gross amount of the dividends if the beneficial owner is a company which controls, directly or indirectly, at least 10% of the voting power in the company paying the dividends; (b) 15% of the gross amount of the dividends in all other cases.
About dividends it is to be forecasted a change about 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 and the reduced domestic withholding tax (11%, instead of 26%) on outbound dividends paid to pension funds set up in an EU Member State.
The “Interest and Royalties” Directive will not be applicable to UK party and therefore, again, only the Treaty will help on reducing the double imposition. The above means that for Interest the withholding will be taxed as following (article 11 of the Treaty):
- Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
- However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 10% of the gross amount of the interest.
On the other side, the royalties will be taxed as provided by the article 12 of the Treaty:
- Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
- However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed 8% of the gross amount of the royalties.
- About interest flows also banks will be effected as per medium-long term loans paid to Banks and Insurance companies established in a EU Member State. Under a corporate focus, it is to be questioned the exemption from withholding tax on outbound interest paid on bonds issued by companies with shares traded on a regulated market or multilateral trading system of an EU Member State and on bonds traded on a regulated market or multilateral trading system of an EU Member State.
The “Merger” Directive will miss UK as a Member State, with the consequent impact of taxation in relation to any re-organization which usually, within the EU Member State environment, would have set a tax deferral or a tax neutrality, within the meaning of the Directive as defined by the domestic legislation. Cross border re-organization could therefore become more (tax) expensive, as today is the rule for International non EU planning. With the (tax) Directive also the Company law Merger Directive will go reinvigorating the difficulties of company planning between UK and Italy.
It is also to analyze the impact on transfer of residence of an Italian entity to UK, as a UK withdrawal could result on a termination of the tax deferral regime granted by domestic laws bused on the common membership of the EU.
The EU Directive about Exchange of Information will not be any more applicable, although exchange will (still) occur within the frame of OECD CRS and/or other International rules. Cooperation to fight terrorism, crimes and financial frauds will continue among the two countries, where in the past years police and other agencies strongly cooperate.
VAT Directives will no longer be applicable. Supplies of goods from the UK to Italy and from Italy to the UK will not qualify as intra-Community supplies but, rather, as importations (subject to VAT) into the EU or exportations from the EU respectively. This will also have an effect in terms of VAT obligations and financial flows. Duties rules will be deeply changed.
On the basis of the above the structure of corporate groups will need to be reviewed with the aim to minimize adverse tax&legal consequences.
A new legal environment will be set for cross-border operations with the UK and the Treaty between Italy and UK will be the first and primary tool, without any benefit from the EU directives and regulations. Aggressive Tax planning and GAAR (Anti Abuse) legislation will be primarily regulated by domestic law, although within a OECD framework.
UK outcome from “Brexit” may well result on a reinvigorated tax&legal regime with even more flexibility to the UK, including the possibility of grants and the introduction of attractive tax regimes, although, we believe, within a frame of full tax compliance and rules far from an aggressive tax haven, but still very attractive both for the level of taxation and for the freedom of business.
Brexit issues are now in the hands of politicians. The next weeks will clear the road map and, possibly, give initial indication to corporate groups and investors on the Italy-UK cross border channel.
Our Firm will duly report about it.
