It is becoming increasingly apparent that the UK will leave the EU on October 31, 2019 with the likelihood of a “hard Brexit” becoming more realistic. As such, managers with cross-border operations should review the tax implications of such an outcome on their structures to ensure they remain tax efficient and do not incur unwelcome tax costs.
Much of the UK tax regime is led by EU legislation and post-Brexit implications of changes to direct and indirect taxes under UK and EU tax law need to be reviewed for group entities. Under a hard Brexit scenario, EU directives will cease to apply. UK businesses will need to rely on double tax treaties in place between the UK and EU countries. Below are some of the key areas of tax-related legislation that will need to be monitored.
- EU laws on the four freedoms: the free movement of goods, services, people and capital;
- The EU Parent Subsidiary Directive that provides relief from withholding taxes on dividend payments made between associated companies in different EU states and provides double taxation relief to parent companies on profits of subsidiary companies;
- The EU Interest and Royalties Directive that relieves withholding taxes on royalty and interest payments between UK companies and associated companies in the EU;
- The EU Merger Directive that provides tax relief on cross-border reorganizations and minimizes tax costs for businesses undertaking merger transactions in the EU; and
- The implications for indirect taxes including VAT, customs duties, excise duties and capital duties (on companies raising capital) on cross-border transactions will need to be considered.
Furthermore, managers may need to restructure their businesses for regulatory purposes (see related article Brexit - Implications for Fund Managers) and establish new EU investment firms, management companies and marketing strategies. Despite the exceptional circumstances, HMRC has publicly stated that it will approach such business restructuring as a result of Brexit no differently to any other corporate event or business change. Therefore, the tax impact of any restructuring as a result of regulatory change and relocation issues relating to the cross-border movement of staff will need to be assessed. Following are some of the key issues investment and fund managers may need to consider for UK tax purposes:
- Taxation of intangible assets: The Intangible Fixed Assets (IFA) regime taxes transactions according to their accounting treatment (with certain adjustments) and includes intellectual property, goodwill and other intangible assets for accounting purposes. A transfer of rights under an investment management agreement, realization of brand or trade names, access to IT systems or knowhow as a result of a reorganization could all fall within the IFA regime.
- Transfer pricing: Where contracts are transferred as a result of a restructuring, an arm’s-length price must be paid for the transaction. Furthermore, businesses will need to review their transfer pricing policy post any restructuring to ensure that intra-group fee flows, and transactions are in line with OECD methodology after the restructuring.
- Third-party valuation: Where there is a transfer of tangible or intangible assets between related parties as a result of a restructure, the market value of the asset must be used for the purposes of calculating the tax payable on a disposal and a third-party valuation of the asset may be required.
- Disposal and goodwill: Where whole or part of a business is transferred as part of a reorganization, the goodwill associated with that part of the business can also be considered sold. The capital gains tax implications of the disposal of the business and goodwill will need to be reviewed.
- Corporation tax: Deductibility of restructuring costs for corporation tax purposes will need to be considered.
- Loan relationships: Tax analysis of any changes to loan relationships between parties following a restructuring will need to be reviewed to consider whether these remain on commercial terms and at an arm’s-length basis.
- Stamp duty: Businesses will need to consider whether there are any Stamp Duty (SDRT or SDLT) consequences of any restructuring and whether reliefs are available.
- VAT: The VAT implications of a transfer upon reorganization (in particular the transfer of going concern rules) and VAT grouping of entities will need to be considered along with the VAT chargeable on resulting provision of services following the restructuring.
- Investment manager exemption (IME): Where whole or part of the investment management function is moved outside the UK, consideration would need to be given to whether protection equivalent to the IME will be available in other EU jurisdictions post restructuring.
- Permanent establishment (PE): Where individuals have positions with non-UK entities as a result of restructuring, there is a risk that they may be deemed to have a PE in the UK and be subject to UK taxation or vice versa in the EU. This is particularly relevant for entities that may not have any permanent office space or other demonstrable presence outside the UK. Any potential PE risks post restructuring would need to be considered.
- Anti-avoidance legislation: Revised business structures may be susceptible to challenge under the complex and extensive anti-avoidance legislation including the Diverted Profits Tax, Profit Fragmentation and other anti-avoidance legislation. Substance requirements where businesses are relocated to non-EU jurisdictions would also need to be considered.
- International tax legislation: It is likely that the UK will continue to remain committed to information sharing and disclosure requirements under Directive on Administrative Cooperation (DAC), DAC 6 and the implementation of Anti-Tax Avoidance Directive (ATAD), ATAD2 (which extends the rules to hybrid mismatches) and the OECD report on the Base Erosion and Profit Shifting project along with existing DTAs. Compliance requirements upon reorganization will need to be monitored.
- Employees: Employment tax issues arise during the cross-border movement of staff including payroll, PAYE, NIC etc. and these should be reviewed where people are relocated as part of a restructuring exercise.
As the eventual outcome of the Brexit negotiations remains to be determined, these observations will continue to be updated as the political and regulatory approach to Brexit continues to evolve. Duff & Phelps can assist asset managers with reviewing their structures from a tax and regulatory perspective and implement changes in advance of UK’s exit from the EU where required.