The impact of Brexit on the UK as a Holding Company jurisdiction

The impact of Brexit on the UK as a Holding Company

We consider the issues surrounding the use of the UK as a holding company jurisdiction post-Brexit.

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Last week we updated you on some of the key areas of tax which we are hearing multinational businesses are most concerned about following the UK’s decision to leave the EU: the use of the UK as a holding company jurisdiction, the impact on the customs duties and reliefs in the supply chain, and the tax impact of restructuring being brought about by other changes such as the loss of regulatory passporting under some Brexit scenarios. Here we consider the issues surrounding the use of the UK as a holding company jurisdiction in a little more detail.

On leaving the EU, the UK will no longer be party to European Directives which provide for zero rates of withholding tax (WHT) on payments within the community. In many cases, the impact may be mitigated by either a nil rate of WHT under domestic legislation, or a favourable rate under the relevant double tax agreement. We may see alternative arrangements made under the terms of the future relationship between the UK and the EU (collectively or with individual Member States) to limit the exposure. Given the uncertainty, multinationals are naturally concerned about the potential tax cost, and may wish to consider their dividend policy for European subsidiaries to minimise any potential future WHT exposure.

For the purposes of assessing the potential impact for your business, we consider that it is important that you get a sense of the scale of the issue – i.e. run the numbers assuming a worst case scenario. Depending on where your (profitable) business is located, this could identify a handful of ‘problem territories’. For example, under current agreements, dividends from Germany and Italy would attract withholding tax at 5 percent, and from Portugal at 10 percent.

If no alternative agreement is reached, these rates will only apply when the UK actually leaves the EU which should be at least two years away. This gives some time to think about what restructuring may be possible, and here we suggest some areas you might want to be thinking about:

  • Would it be possible to pay an abnormal dividend? Would there be a local tax cost of doing so?
  • An alternative for many groups might be to restructure into a different holding company model. In a post-BEPS world, this would of course need to tie in with the wider business of the group and must make sense when looking at where the group’s current operating structure is and the location of management activity.
  • If the group were to adopt a branch model, would this help to alleviate future WHT? This option would clearly need careful analysis as there may be tax costs of such a restructuring. Particular attention should be paid to the timing of any reorganisation, as it may be possible to utilise tax reliefs and exemptions which are currently available (e.g. the EU Merger Directive). This may be a particularly attractive option for those groups which are expanding into a new market, and do not need to transfer existing operations.
  • The branch model may not be appropriate for all businesses (e.g. retailers who need a locally registered entity to hold retail property leases), and so a further option may be to look into whether local operations could be transferred to a different form of local legal entity which may not be subject to WHT.
  • And of course, it is important to keep the bigger, commercial picture in mind: there will no doubt be wider commercial and tax implications of the various corporate structures so the options should be looked at on a more holistic basis than just dividend WHT.

With the full implications of Brexit still not clear, KPMG in the UK will continue to monitor developments and keep you informed of the potential implications for you and your business. We’ll be releasing regular updates and insight into any developments as they occur – the best way to keep up to date is to register for our EU Referendum Forum. We will continue to keep you updated and share with you our insights based on the work and discussions we have been having with clients over recent weeks. If you would like to discuss the impact on your business specifically, please do get in touch.

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