Repatriating profits to the UK

27 July 2016

It looks like withholding taxes on dividends from EU subsidiaries or payments of interest or royalties to or from companies located in the EU may become a cash flow problem in the wake of UK’s decision to leave the EU.

Right now, the parent subsidiary directive allows subsidiary companies to pay dividends up to UK parent company without the need to account for withholding tax. Similarly, companies often rely on the interest and royalties directive to make interest or royalty payments free from either UK or local withholding taxes.

Speculations are that the UK may follow the Swiss position on WHT and that the current arrangements will be amended. If however this is not the case, companies would be relying on existing bilateral double taxation agreements in order to reduce or eliminate withholding tax rates.

The UK already has an extensive double tax treaty network which includes treaties with all of the other EU 27 member states. It should be noted however that more than half of these which include for example Germany and Luxembourg still allow the tax authorities in the payer company jurisdiction to levy withholding tax. Although often at relatively low rates, it is another tax issue to be managed.

Certainly the outcome of negotiations around withholding taxes may impact the UK’s current position as a favorable holding company location for international businesses with EU operations albeit the UK is still likely to retain is relatively flexible CFC rules, Foreign dividend exemption, no with holding tax on dividends payable and a lower corporation tax rate.

International businesses should consider:

  • If having foreign branches rather than foreign subsidiaries is better for them in the future?
  • If the current group structure could trigger withholding tax under just the UKs DTAs?
  • If the possibility of withholding taxes will have a large enough impact to justify a group restructure?
  • If the group financing arrangements within the EU need to change (example- to minimize WHT re interest payments)?

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