On 20 March 2019, just nine days before the initial deadline for the UK to leave the EU, HMRC published its guidance on the impact of Brexit on withholding tax (WHT) on interest, royalties and dividends.
The IRD currently allows EU companies to make interest and royalties payments to associated organisations within the EU without needing to deduct tax at source from the payments.
In the event of a ‘no deal’ Brexit, IRD will no longer apply, impacting on those EU businesses trading cross-border between the EU and the UK.
For EU groups of companies dividends can also currently be paid between associated companies without the need for tax to be withheld.
Under a ‘no-deal’ Brexit, some companies resident in other EU member states may have to start deducting tax from dividend payments made to the UK as the PSD will no longer apply.
Jane Mackay, Head of Tax, Crowe UK, comments:“Companies and groups have become used to relying on EU directives to reduce or eliminate WHT and to simplify their administration costs and procedures.
“If, come the UK’s eventual departure date, a deal has not been worked out, then it is possible that with IRD no longer in operation, then overseas organisations may start to charge WHT on dividends, royalties and interest paid to UK companies. It is essential that those businesses with overseas interests in EU territories determine whether this will have a real cash cost, particularly if they are charities, non-taxpayers, or are a loss-making entity.
“For group structures, it will not just be WHT which may disappear. Other direct tax reliefs and simplifications which are currently in operation may also soon cease to exist, so it is vital that specialist advice is sought to ensure compliance and to reduce the risk of unnecessary impacts on operations.”
Simon Crookston, Partner, Crowe UK, comments:“Many companies that currently do not suffer withholding tax on intra-EU group dividends, royalty and interest payments seem unaware that the IRD and PSD Directives may disappear, or don’t appreciate their significance in group planning.
“In many, but not all, situations the UK’s double taxation network with EU countries will enable groups to mitigate the WHT requirement. However, treaty reliefs are not automatic and generally must be applied for from the local taxing authority. To get a relief certificate, applications need to be made to HMRC and overseas EU tax authorities; this process can be time consuming and can in some situations lead to payments needing to be delayed to prevent withholding tax occurring.
“I would strongly advise companies with overseas operations evaluate their cross border transactions, identify where they may have a potential WHT tax problem and start putting preventive treaty applications in place.”
Stuart Weekes, Partner, Crowe UK, comments:“Brexit discussions have been in the headlines for so long now, with no clear outcome. In these circumstances it would be easy for companies to hesitate before taking action. However in this tough market, companies have to be competitive and this can mean reducing prices. In order to protect their margins they need to consider costs such as WHT and take mitigating actions to reduce their exposure to such taxes. This is the time to innovate, to consider whether there are other locations that combine favourable WHT rates with attractive trading markets. Failure to plan and take action now may set UK companies behind the competition at a time when they need to be ahead.”