The impact of Brexit on direct tax implications affecting various financing and other structures is gradually becoming apparent:
- L is a Luxembourg fund performing direct lending activities in the US. Its US activities are managed by M, a US based asset manager. Currently L’s USA activities are managed in such a way that a Permanent Establishment is not created in the US as M is an “independent” agent managing several client’s activities. As L’s USA income is not attributable to a local PE under the USA-Luxembourg DTA there is no taxable nexus there. Currently, there are UK based investors in L but following Brexit the “derivative benefits” provision in the limitation of benefits clause in the DTA may no longer give L eligibility under the DTA if the ultimate shareholders reside in a country no longer a member of the EU. Thus L’s US originated income may be subject to US tax. This case study illustrates certain unintended consequences of Brexit affecting DTAs and structures in other EU member states too.
2. US Corporate Inversions / Regional HoldCo for US parented groups
Currently the UK is an attractive location for a regional Holding Company for US HQ’d groups given comparatively low rates of UK corporation tax, the Substantial Shareholdings Exemption, the Foreign Dividend exemption and access to EU treaties and Directives. US “check the box” rules ensure operating companies to become “disregarded entities” below a regional holding company such as a UK Holdco. This assists from the perspective of US CFC rules. The Trump Presidency is proposing reduced US corporate rates, territorial exemption for non-US active business earnings, elimination of the CFC regime for active business income and reduced rates for repatriation of prior period earnings. Post Brexit, UK Holdcos could face increased effective CT rates through loss of access to EU directives for zero WHT on dividends, interest and royalties. These developments could have an adverse effect on the benefits of UK regional Holdcos for US parented groups.
3. Insurance related activities
UK insurance groups may need to trigger the establishment of Ireland based insurers and re-insurers in order to access Europe bearing in mind Solvency II provisions.