The potential changes to the taxation of dividends post-Brexit could have a significant impact on UK companies. And it’s not just dividends from the remaining 27 EU countries: in some cases, the US will also increase dividend taxes for UK corporate shareholders as a direct result of Brexit.
The European ‘Parent-Subsidiary’ directive provides that dividends paid to certain shareholders are exempt from withholding tax (WHT) in the country of the paying company. Similarly, the European Interest and Royalties Directive exempts from tax certain payments of interest and royalties between associated companies of different EU member states. However, after Brexit, UK companies will no longer be able to benefit from these WHT exemptions.
Any dividend or other distribution received by a UK company is subject to corporation tax; but in practice most dividend income is exempt from UK corporation tax. This means that any foreign tax withheld from a dividend payment is an irrecoverable cost for UK companies.
Unfortunately, not all of the UK’s double taxation agreements with EU member states provide for 0 per cent WHT. Indeed, the agreements with France, Ireland, Germany and Italy specify that WHT of 15 per cent applies to dividend payments made to UK shareholders.
That said, many of our double taxation agreements provide for a reduced rate of WHT where the UK shareholder holds 10 per cent or more of the paying company’s share capital. But, whilst France and the Netherlands will reduce the WHT to 0 per cent, Ireland, Germany and Italy will still impose WHT of 5 per cent, and Spain will only reduce to 10 per cent its WHT on dividends paid to parent companies.
Counter-intuitively, Brexit could also affect UK companies with investments outside the EU. For example, although the double taxation agreement with the US provides for no WHT on certain dividends, in order for some unlisted companies to qualify for the exemption there is a requirement that at least 95 per cent of the UK company is held by seven or fewer residents of a member state of the EU or of a European Economic Area state. This test would be one that UK companies would no longer be able to meet if the UK (like Switzerland) lands up being a member of neither the EU nor the EEA.
Overall, UK companies with foreign dividend income need to recognise that there might well be unavoidable additional tax costs after the UK leaves the EU in 2019; and might want to consider extracting dividends beforehand.
For more information, please comment below or get in touch with Stuart Robb.