These changes have complicated the already though negotiations and based on the current news, we are heading to the so-called Hard Brexit without any agreement, which will start after the end of the transitional period on 31.12.2020, respectively as of 1.1.2021. This situation will have the following effects in the world of taxes:
The exit of the United Kingdom from the European Union will lead to some significant changes in the area of the income taxes and especially much wider usage of the double tax treaties. Respectively, as regards the personal income tax, one of the key role would play determination of the so-called tax residency.
As regards individuals who are residents of the United Kingdom and have income from sources in the Czech Republic, it is still possible to claim all statutory tax relieves and tax deductions in 2020, provided that at least 90 % of their global income is sourced in the Czech Republic. Nevertheless, the application of these deductions is generally assigned only to the residents within the European Union or European Economic Area. Therefore, as Brexit means leaving this area, these options will be denied except the basic tax deduction and deduction for students.
Concerning so-called migrating employees from the United Kingdom who were sent to work in the Czech Republic by their employer, Brexit also means adjustments in calculation of the tax due to change in super gross salary calculation (if it will remain a part of the Czech tax law). Concerning the social and health insurance paid by employers, the rates of the United Kingdom will be applied by the end of 2020. Starting from 2021, the rates of the Czech Republic will be applied instead. In this respect, we would like to point out that there is currently political discussion related to the calculation of the tax and abolishing of the super gross salary institute. If this abolition will be approved, the above would be not relevant for migrating employee from the United Kingdom.
As regards legal entities, the biggest change will be in the rules for payment of dividends. Currently, this is tax exempt within the European Union under certain conditions in accordance with the relevant European guideline. Once the United Kingdom will leave the European Union, the tax exemption of dividend payment will be limited. Th dividend payment from the United Kingdom to the Czech Republic should – under the current rules – fulfill the conditions for the exemption under the Czech income tax act as well as the double tax treaty. However, the restrictions will be applied for opposite direction, i.e. the payment of dividends from the Czech Republic to the United Kingdom. Starting from 2021, this direction of dividend payment will be subject to 5% tax rate for parent companies with voting rights of at least 25%. If this condition is not met, the tax rate of 15% is applicable based on the double tax treaty.
Probably the most significant change in terms of VAT starting from 2021 is clearly the change in the position of the United Kingdom from another Member State of the European Union to a so-called third country. In other words, there will be a change from intra-Community supply and acquisition of goods to export and import. Obligations and changes in reporting are also related to this change. From 2021, transactions from the Czech Republic to the United Kingdom will not be subject to the obligation to submit a European Sales List. On the other hand, there will be also restrictions, for example, within the so-called simplified procedure within the triangular trade etc.
Furthermore, we would like to point out that it will not be possible to claim a VAT refund paid in the United Kingdom through the electronic VAT refund portal within the European Union. How and under what conditions it will be possible to claim a refund of VAT paid in the United Kingdom after 31.12.2020 is currently not specified. Therefore, it is possible to recommend to check whether the company does not have in its records any VAT paid in the United Kingdom, which could be claimed and thus, be able to submit and application for a refund of VAT paid in the United Kingdom in time.
Brexit means that the United Kingdom is leaving the European Union and also the customs union at the beginning of year 2021. This means obligations to submit customs declarations and further conditions for the Custom offices such as tariffs, products labeling etc. Also, there is high chance that the border checks will delay the whole process. The issue of the customs is currently one of the key topics.
In addition to the above, Brexit also abolishes the obligation to submit ITNRASTAT reports for transactions to the United Kingdom and, in many cases, the obligation to register to obtain an Economic Operator Registration and Identification (EORI) number for customs purposes within the European Union.
In the context of Brexit, we would strongly recommend reviewing all potential risks for all business entities which might be affected. All existing as well as new contracts and the related procedures should be verified in the light of their tax treatment, especially occurrence of registration obligations or their abolishment. Should you seek assistance in this area, we will gladly help you with deep review of possible tax consequences, connected with proposal for the optimal tax solutions. Also, thanks to the fact that we are part of Crowe Global, which operates all over the world including the United Kingdom, we are ready to response all your queries and in case of need, we will be happy to include our colleagues form the other side of La Manche.
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