Tax implications of BREXIT for businesses operating in Europe

The UK’s departure from the European Union (EU) on 31 December 2020 has brought significant changes to the tax landscape for businesses operating in Europe. In this blog post, we will explore some of the key tax implications of Brexit and provide some practical guidance for businesses to navigate the new rules and regulations.

One of the main tax consequences of Brexit is the end of the EU’s single market and customs union, which means that the UK is no longer part of the EU’s VAT and customs regimes. This has several implications for businesses that trade goods or services between the UK and the EU, such as:

  • The need to register for VAT in both the UK and the EU country where they supply or receive goods or services, and to comply with different VAT rules and rates in each jurisdiction.
  • The need to account for import VAT and customs duties when moving goods across the UK-EU border, and to complete customs declarations and other formalities.
  • The need to apply for special authorisations or licences to export or import certain goods, such as agricultural products, chemicals, or firearms.
  • The need to consider the impact of Brexit on transfer pricing arrangements, withholding taxes, and double taxation relief.

Another tax consequence of Brexit is the loss of access to certain EU tax benefits and mechanisms that were previously available to UK businesses, such as:

  • The EU Parent-Subsidiary Directive and the EU Interest and Royalties Directive, which provided exemptions from withholding taxes on dividends, interest, and royalties paid between associated companies in different EU countries.
  • The EU Arbitration Convention, which provided a mechanism for resolving cross-border tax disputes between EU countries.
  • The EU Anti-Tax Avoidance Directive (ATAD), which introduced common anti-abuse rules to prevent aggressive tax planning by multinational companies.

These changes mean that UK businesses may face higher tax costs and compliance burdens when operating in Europe, and may need to review and restructure their existing business models and transactions. However, there are also some opportunities for UK businesses to benefit from Brexit, such as:

  • The ability to set their own corporate tax rate and policy, which could make the UK more attractive as a destination for foreign investment and innovation.
  • The ability to negotiate new trade agreements and tax treaties with other countries outside the EU, which could open up new markets and reduce trade barriers.
  • The ability to take advantage of existing tax reliefs and incentives that are still available to UK businesses, such as the Patent Box regime, the Research and Development tax credit, and the Enterprise Investment Scheme.

Customs Duties and VAT:

Following Brexit, the UK is no longer part of the EU Customs Union and Single Market. This means that businesses engaged in the import and export of goods between the UK and EU countries now face customs duties and additional administrative requirements. VAT rules for cross-border transactions have also changed, requiring businesses to comply with new VAT regulations and potentially register for VAT in multiple jurisdictions.

Cross-Border Services:

Businesses providing cross-border services between the UK and EU now face changes in tax regulations. For example, the VAT treatment of services has changed, and businesses may need to consider VAT registration requirements in multiple jurisdictions. In some cases, businesses may also face additional reporting obligations and compliance procedures.

Transfer Pricing:

For multinational companies with operations in the UK and EU, transfer pricing arrangements may need to be reassessed due to Brexit. Transfer pricing rules and documentation requirements may differ between the UK and EU member states, potentially impacting intercompany transactions and related tax implications.

Tax Treaty Impact:

The tax treaties between the UK and EU member states that were previously in force based on the UK’s EU membership may need to be renegotiated or amended. This can affect the tax treatment of cross-border transactions, including issues related to withholding taxes, double taxation relief, and permanent establishment rules.

EU Directives and Tax Advantages:

Certain tax advantages and benefits that were available to businesses operating within the EU, such as the Parent-Subsidiary Directive and the Interest and Royalties Directive, no longer apply to UK businesses. As a result, businesses may need to review their corporate structures, financing arrangements, and tax planning strategies to adapt to the new tax landscape.

Tax Compliance and Reporting:

Brexit has led to changes in tax compliance and reporting requirements for businesses operating in the UK and EU. Businesses may need to register with tax authorities in both jurisdictions, comply with separate tax regulations, and meet additional reporting obligations. It is essential for businesses to stay updated on the specific requirements and deadlines to ensure compliance and avoid penalties.

Transitional Measures:

Both the UK and the EU have implemented transitional measures to mitigate the immediate impact of Brexit on businesses. These measures aim to provide temporary relief or specific arrangements in certain areas, such as customs procedures, VAT treatment, and social security contributions. Businesses should be aware of these transitional measures and consider their implications in their tax planning and operations.

Permanent Establishment (PE):

Brexit may affect the determination of permanent establishment for businesses with operations in both the UK and EU member states. The criteria for establishing a taxable presence in a particular jurisdiction may change, impacting the allocation of profits and tax liabilities between entities.

Employee Mobility:

Changes in immigration rules and the free movement of workers between the UK and EU member states can have tax implications for businesses. This includes potential changes to payroll taxes, social security contributions, and employee benefits. Employers may need to reassess their tax obligations and compliance requirements related to cross-border employee mobility.

Intellectual Property (IP) Rights:

Businesses holding or licensing intellectual property rights may need to review their IP arrangements due to Brexit. This includes assessing the tax implications of transferring or licensing IP between the UK and EU, as well as considering the impact of any changes in IP-related tax incentives or regimes.

Indirect Taxes:

Apart from VAT, businesses need to consider other indirect taxes, such as excise duties and customs duties, which may be affected by Brexit. Changes in rules and procedures related to the movement of goods and services can impact the tax treatment and compliance obligations for businesses.

State Aid and Subsidies:

EU state aid rules no longer apply to the UK post-Brexit. This can impact the availability of certain tax incentives, grants, and subsidies that were previously accessible to businesses operating in the UK. Businesses should review their eligibility for such schemes and consider alternative options for government support.

Tax Disputes and Double Taxation:

Brexit can have implications for tax disputes and double taxation issues between the UK and EU member states. Businesses may need to navigate different dispute resolution mechanisms and procedures for resolving tax disputes, such as mutual agreement procedures and arbitration clauses, which vary between jurisdictions.

Tax Planning and Compliance:

Brexit has introduced additional complexity to tax planning and compliance for businesses operating in Europe. It is crucial for businesses to review their existing tax strategies, structures, and arrangements to ensure they remain efficient and compliant in the new post-Brexit landscape. This may involve restructuring operations, revising supply chains, and engaging in proactive tax planning.

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