Update on the Brexit transition period
The United Kingdom (UK) and the EU reached an agreement (the Withdrawal Agreement) on the conditions for the UK’s departure from the EU, including a transition period.
Based on the Withdrawal Agreement, a transition period will be applicable until 31 December 2020. Unless otherwise provided in the Withdrawal Agreement, all EU rules and regulations will continue to apply to the UK during the transition period.
Concerns have previously been raised that several Dutch corporate income tax regulations are impacted by Brexit. During the transition period, however, there should be no direct impact on these regulations due to the application of the Withdrawal Agreement. This is still uncertain for the period after 31 December 2020. Claiming benefits under a tax treaty with a limitation on benefits provision may be impacted immediately.
“Sister fiscal unity” with UK parent
For Dutch corporate income tax purposes, a fiscal unity may be formed between sister companies with a mutual (in)direct parent company in the EU. A fiscal unity files a consolidated Dutch corporate income tax return. Following Brexit, ‘sister fiscal unities’ with a mutual (in)direct UK parent company would be dissolved, as the condition for the mutual (in)direct parent company to be established in the EU would no longer be met. However, such ‘sister fiscal unities’ would still be considered to fulfill the condition of having a mutual (in)direct parent company in an EU Member State during at least the transition period. Therefore, the fiscal unity of Dutch sister companies should not be dissolved at least until the end of the transition period (31 December 2020).
Dividends distributed by Dutch resident companies are in principle subject to 15% Dutch dividend withholding tax. Subject to conditions, these dividends could be exempted if the shareholders are resident within the EU or in a treaty country. During the transition period, the EU Parent-Subsidiary Directive will continue to apply to outbound payments of dividends. Due to the Dutch dividend withholding tax exemption and the tax treaty between the Netherlands and the UK, outbound dividends to the UK may still benefit from the Dutch dividend withholding tax exemption after the transition period. Other EU countries may have a less favourable regime. Therefore, it may be advisable to review whether the Netherlands could be an alternative for acting as an entry for UK groups/companies to the EU.
Outbound interest and royalties
The EU Interest and Royalties Directive will continue to apply to outbound payments of interest and royalties during the transition period. The Netherlands do not currently have a withholding tax on interest and royalties. From 1 January 2021, a withholding tax on interest and royalty payments to affiliated companies in low-tax jurisdictions and in case of abusive situations will be introduced. As such, outbound interest and royalty payments to the UK may still benefit from the favourable treatment by the Netherlands. Other EU countries may have a less favourable regime. Therefore, it may be advisable to review whether the Netherlands could be an alternative for acting as an entry for UK groups/companies to the EU.
Inbound dividends: participation exemption
Brexit also has an impact on Dutch resident companies that receive a dividend from the UK. These dividends may be exempt from Dutch corporate income tax, if the conditions of the Dutch participation exemption are met. One of these conditions is that the Dutch resident company must hold at least 5% of the share capital in the participation. The Dutch participation exemption could also be applicable if:
- The Dutch resident company holds less than 5% of the share capital in a company residing in an EU Member State; and
- The Dutch resident company holds at least 5% of the voting rights in that entity; and
- A tax treaty has been concluded with the relevant EU Member State in which the dividend article has a voting right provision.
Shareholdings in UK-resident companies could potentially meet the above conditions until at least the end of the transition period. However, this would no longer be the case after 31 December 2020. From that date, dividend income arising from shareholdings in UK-resident companies – reflecting less than 5% of the share capital, but more than 5% of the voting rights – could be subject to Dutch corporate income tax.
Exit taxes and cross-border (de)mergers
In principle, where assets are transferred on the migration of a company or as a result of a cross-border (de)merger, any capital gains/hidden reserves are realised and will have to be taken into account for Dutch corporate income tax purposes. However, in case of a migration to another EU country, the Dutch corporate income tax can be paid in five annual instalments after the Dutch corporate income tax assessment has been issued. In the case of a cross-border EU (de)merger, rollover relief may be granted. These provisions could still apply to a migration of a company to the UK or (de)mergers involving UK companies during the transition period. After 31 December 2020, this will no longer be the case. Therefore, it may be advisable to review whether any restructuring possibilities should be finalised before the end of the transition period.
Limitation on benefits provision tax treaties
Tax treaties with a limitation on benefits (LOB) provision may be impacted by Brexit. Under an LOB provision, the right to claim treaty benefits is dependent on a number of conditions. Some of these conditions relate to tax residency in the EU. Therefore, companies that claim treaty benefits on the basis of the tax residence of the shareholder in the UK - as part of the EU - may be denied treaty benefits after Brexit. The transition period may not provide for relief. Therefore, it is advisable to review the potential impact of Brexit on claiming treaty benefits under a tax treaty with an LOB provision.
Niek de Haan