On March 20, 2019, HM Revenue and Customs (HMRC) published guidance on the impact a no-deal Brexit would have on withholding taxes for interest, royalties and dividends.
Interest and royalties received from EU countries
Currently, the EU Interest and Royalties Directive (IRD) allows payments of interest and royalties to be made without the deduction of withholding tax between EU member states, including the UK. If the UK leaves the EU, the IRD will not apply to payments made to and from the UK.
For payments of interest and royalties from the EU to the UK, the absence of the IRD means that the EU member state may start to deduct withholding tax, depending on the Double Taxation Agreement (DTA) between the UK and the EU member state.
Where a UK resident company receives interest or royalties from an associated EU resident company that has suffered withholding tax, the UK company can usually apply to claim some, or all (or apply for a full or partial exemption) of the tax suffered under the DTA.
Some DTAs allow for exemption from withholding tax where the payments are exempt from domestic withholding, e.g. France and Germany. Alternatively, the DTA may limit the amount that can be withheld, such as in Italy.
In order to establish the correct position, businesses should check the relevant DTAs here.
Dividend payments received from EU countries
In addition, the EU Parent/Subsidiary Directive (PSD) will not apply to the UK if there is a no-deal Brexit. Whilst the UK does not impost withholding tax on dividends paid, some EU countries do, and therefore dividends paid from EU countries to the UK may suffer withholding tax.
Some DTAs allow an amount to be deducted from a dividend payment but cannot exceed a specific amount, although the payments are not entirely exempt. For example, payment to the UK from Germany or Italy.
Again, you should check the applicable DTA to establish the correct position.
Payments of interest and royalties from UK
UK companies are not currently required to deduct withholding tax on interest and royalty payments to associated companies in the EU and will continue to pay gross in the event of a no-deal Brexit.
However, for interest payments, this exemption is not automatic and the person receiving the interest will need to complete an exemption form, which can be found here. This form can also be used to claim a repayment of any withholding tax suffered.
Royalty payments can continue to be paid gross where the payer reasonably believes that the payment is exempt under current UK tax legislation.
Payment of dividends from UK
There is currently no domestic law requirement to deduct withholding tax from dividend payments made by UK companies. Therefore, a no-deal Brexit will have no impact as companies can continue to pay dividends gross.
In order to prepare for a no-deal Brexit, businesses should consider the impact of any new withholding tax applied to interest, royalty and dividend receipts. To ascertain any amounts, businesses should review the relevant DTAs.
Where interest is paid to an EU country, businesses should ensure that the receiver has the correct exemption form in place and ensure that they have reasonable grounds to make royalty payments gross (or withhold the tax).
It should be noted that even in the event of a deal, withholding taxes are likely to be impacted as the UK will no longer be an EU member state and legislation such as the IRD and PSD may no longer apply.
Should you wish to review your withholding tax position, either in light of Brexit or more generally to ensure that the most beneficial rates are being achieved, please contact us.