Anticipating The Tax Implications Of Brexit

• Date: 10 September 2018

While it is still too early to take a position on the actual consequences of the Brexit, the main tax implications for groups with operations both in France and in the UK can and should already be anticipated. Notably, Brexit's entry into force will call the application of the EU legislation and regulatory system into question in the UK. One therefore wonders whether the numerous double tax treaties entered into by the UK will be sufficient to compensate for the disappearance of the tax benefits resulting from the EU legislation.

While it is still too early to take a position on the real consequences of the UK's exit from the European Union (EU), the main tax implications for groups with operations both in the EU and in the UK can and should already be anticipated.

Notably, Brexit's entry into force will call the application of the EU legislation and regulatory system into question in the UK. One therefore wonders whether the numerous double tax treaties (DTT) entered into by the UK will be sufficient to compensate for the disappearance of the tax benefits resulting from the EU legislation.

The below provides an overview of the main identifiable tax impacts of Brexit.

1. The impact on withholding tax (WHT): end of the application of the "Parent-Subsidiary" and "Interest and Royalties" Directives and return to conventional rates

   The tax treatment of dividends, interest and royalties has been largely influenced by the Parent-Subsidiary Directive1 and the Interest and Royalties Directive2 which would no longer be applicable after the Brexit.

   From a French tax standpoint, the impact of the Brexit on these flows can be summarized as follows:

   Before the Brexit After the Brexit Dividends from France to the UK 0% WHT for shareholding >5% 15% WHT for shareholding btw 5% and 10% 0% for shareholding >10% Dividends from the UK to France Tax exempt except for a 5% lump sum reduced to 1% if (notably) the French company holds >95% of the UK subsidiary Tax exempt except for a 5% lump sum unless the UK joins the European Economic Area (EEA) Interest 0% WHT 0% WHT Royalty 0% WHT 0% WHT 2. The impact for tax consolidation groups

   As a reminder, since the famous "Papillon"3 judgment of the Court of Justice of the European Union (CJEU), French subsidiaries held through a subsidiary located in the EU or EEA may be tax consolidated with the other French companies.

   In addition, since 2014, French sister companies whose joint parent entity is established in the EU...