Brexit tax: Holding companies

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Donald-Drysdale By Donald Drysdale for ICAS

26 July 2016

Following the Brexit vote, Donald Drysdale explains why multinationals must re-assess the UK’s merits as a holding company location.

Holding company operations

The UK’s decision to leave the EU raises fundamental tax questions for multinational businesses. One of these is the continuing suitability of the UK as a holding company location after its eventual departure from the EU.

Clearly, attracting and retaining holding company operations is crucial to the UK’s future prosperity. In the open season triggered by the Brexit vote, we can expect not only other EU member states but also countries beyond Europe to be jostling to acquire rich pickings from the fallout of any businesses deciding not to use the UK for their holding companies.

Withholding taxes

On exiting the EU, the UK will cease to be a party to the EU Directives which provide for zero withholding tax on dividend and interest payments within the EU.

In many circumstances a zero withholding tax, or an otherwise favourable rate, may continue to apply – either under domestic legislation, or under the terms of double tax treaties. Alternatively, the forthcoming Brexit negotiations might (or might not) result in new arrangements that could limit withholding taxes between the UK and EU member states.

How attractive is the UK?

Even after leaving the EU, the UK will retain many attractions as a holding company location. It levies no withholding taxes on dividends. It offers an exemption from corporation tax on gains on disposals of substantial shareholdings. It provides exemption from corporation tax on most dividends received, and has an extensive network of double tax treaties to reduce or eliminate non-UK withholding taxes that might otherwise be imposed on such dividends.

Looking ahead, former Chancellor George Osborne had a vision of Britain attracting additional inward investment by continuing his race to the bottom, slashing the corporation tax rate to 15% by 2020. It is unclear whether this will still be pursued now that Philip Hammond is Chancellor.

To attract businesses, the UK must offer stability and certainty in its tax system, as highlighted in Brexit tax: What UK business needs from the new Treasury team. It may not be in the UK’s best interests to be seen as (in effect) an aggressive tax haven at a time when other developed nations are tackling Base Erosion and Profit Shifting responsibly through concerted actions flowing from the OECD’s BEPS project.

Uncertain negotiations

At this early stage there’s no telling where the Brexit talks will lead us, and businesses considering the UK as a holding company location must face the reality that tax is only one of a myriad of issues to be addressed by governments. It may take some time for the fiscal mists to clear.

Even in cases where pre-existing corporate structures are thought likely to be sound for future tax purposes, other factors may influence the choice of business location. An example is ‘passporting’, which currently allows authorised financial services businesses to operate across the EU from a base in the UK; this won’t be possible after Brexit unless a special deal can be negotiated.

It is hard for multinationals to plan for business after Brexit without knowing what precisely will emerge. It adds further complexity that the Brexit talks will be taking place at the same time as countries are making changes arising from BEPS, including the implementation of proposals to restrict treaty abuse.

The need for planning

Where an ultimate or intermediate holding company is already based in the UK, or a multinational enterprise is considering locating a holding company here, the Brexit vote creates a fundamental requirement for immediate analysis and planning. In many cases the UK will still be an ideal holding company location, but there may be a need to consider carefully the shape of future dividend flows.

In some instances, where moving a holding company from the UK to another EU member seems advisable, it might be beneficial to reorganise before Brexit takes effect, since the group would still be able to take advantage of the special rules which facilitate reorganisations within the EU. Similar provisions might not be available after Brexit.

Within the UK, the uncertain positions of Scotland and Northern Ireland add to the current confusion. If they were to find a way of remaining in the EU, then they might prove to be more attractive holding company jurisdictions than England and Wales.

Article supplied by Taxing Words Ltd

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