Brexit direct tax: EU held trading group with UK connection

There is a EU parent company P which holds 100{e68217344b855fcd608ed2c4c41f83644da7cd41ea524fbfa2ad06c632d3255d} of a UK holding company H which in turn owns 100{e68217344b855fcd608ed2c4c41f83644da7cd41ea524fbfa2ad06c632d3255d} of EU trading subsidiaries.

As the UK does not levy withholding tax (WHT) on out-going dividends, H’s dividend distributions to P are not expected to be affected by Brexit.

Post-Brexit “reduced” WHT rates under bilateral DTAs with EU trading partner countries are likely to apply to dividends, interest and royalties as the UK will no longer benefit from “zero” WHT rates under the EU Parent-Subsidiary and Interest & Royalty Directives, without an “equivalence” agreement in place with the EU.

If P has capitalised the UK Holdco H via loans, WHT on interest payments will apply at the UK’s current domestic rate of 20{e68217344b855fcd608ed2c4c41f83644da7cd41ea524fbfa2ad06c632d3255d} subject to DTA relief and other domestic exemptions.

The UK is expected to retain its Substantial Shareholdings and Foreign Dividend exemptions at a domestic level.  Therefore, disposals of H’s holdings in underlying subsidiaries are expected to remain free of capital gains tax subject to conditions of the SSE.  In addition, dividends from underlying subsidiaries will remain exempt in the hands of H under domestic law and unaffected by Brexit.

However, as the EU Parent-Subsidiary Directive will no longer apply to the UK after Brexit, gains from disposal of shares in H and dividends from H may become taxable in the hands of the parent company P.  Taxability will depend on the DTA between the UK and P’s jurisdiction.

There are also CFC and fiscal consolidation rules to consider which might adversely affect the group’s overall tax position.