IN506 - UK Holding Companies and Brexit - What are the Implications?

Many have asked “What are the implications caused by Brexit for the UK’s status as a premier jurisdiction for holding companies?”

Below we examine a number of the features that make a good holding company jurisdiction and consider the UK holding company offering both pre and post Brexit (as of December 2017).

Participation Exemption

Virtually all dividends received by a UK company, be they from the UK or overseas, are exempt from tax. 

  • This will continue to be the case after Brexit.

Capital Gains Tax Exemption on Disposal of Shareholdings 

Disposals of substantial shareholdings in trading companies or the holding companies of trading groups are exempt from UK corporation tax, provided that certain conditions are met.

  • This position will not change post Brexit.

No Withholding Tax on Dividends

The UK does not levy withholding tax on dividends paid from UK companies. 

  • This position will not be affected by Brexit.

No Imposition of Capital Gains Tax on Profits Arising from the Sale of Shares in a Holding Company

The UK does not impose capital gains tax on the sale of shares in a UK company by non-residents of the UK. 

  • Again, Brexit will not affect this position.

Minimisation of Withholding Tax on Dividends, Interest and Royalties Paid to UK Companies

The UK has one of the largest networks of double tax treaties in the world.  In most situations where a UK company owns more than 10% of the issued share capital of a foreign company, the rate of withholding tax is reduced to 5% (in some cases it is reduced to zero).

UK companies currently have access to the EU Parent/Subsidiary Directive, as well as the Interest and Royalties Directive, thereby reducing the withholding tax to zero for many European countries.

Different EU countries do not have the same laws governing when the benefit of these directives can be applied.  In many cases, where the ultimate beneficial owner is not resident in the claiming jurisdiction, access to the directives is denied.

Post Brexit, UK companies might not have access to all of these directives.

The ‘fall-back’ position would therefore be to claim relief under one of the UK’s double tax agreements.  The table below shows the effective ‘fall-back’ position to whichever is the better rate: normal domestic rate OR the UK treaty rate.

 

Dividend WHT

Interest WHT

Royalty WHT

Austria

5%

0%

10%

Belgium

0%

10%

0%

Bulgaria

0%

0%

5%

Croatia

5%

5%

5%

Cyprus

0%

0%

0%

Czech Republic

5%

0%

10%

Denmark

0%

0%

0%

Estonia

0%

0%

10%

Finland

0%

0%

0%

France

0%

0%

0%

Germany

5%

0%

0%

Greece

10%

0%

0%

Hungary

0%

0%

0%

Ireland

0%

0%

0%

Italy

5%

10%

8%

Latvia

0%

0%

0%

Lithuania

5%

0%

10%

Luxembourg

0%

0%

0%

Malta

0%

0%

0%

Netherlands

0%

0%

0%

Poland

0%

5%

5%

Portugal

0%

10%

5%

Romania

10%

10%

15%

Slovakia

0%

0%

10%

Slovenia

0%

0%

5%

Spain

0%

0%

0%

Sweden

0%

0%

0%


The zero rate for dividends may be conditional on a minimum shareholding requirement.

Non-imposition of Capital Duty on Share Capital

In the UK there is no capital duty on paid up or issued share capital.  Stamp duty at 0.5% is payable on subsequent share transfers. 

  • Brexit will not change this.

No Minimum Paid Up Share Capital

There is no minimum paid up share capital for normal limited companies in the UK.  For public companies the minimum issued share capital is £50,000. 

  • Brexit will have no effect on this.

Low Tax on Non-dividend Income

The UK has relatively low corporate taxes.  The current rate is 19%, and will fall to 17% from April 2020.

In the case of a ‘Hard’ Brexit this could fall further and faster as the UK enacts legislation to make itself more attractive to foreign investors.

Profits of Overseas Branches

A UK company can elect for the profits of its overseas branches to be exempt from UK tax.

  • This election will not be negatively impacted by Brexit.

Research and Development and Patent Box Regimes

The UK offers attractive R&D and Patent Box regimes.

  • Brexit will have no effect on either of these regimes.

Access to Capital Markets

London has perhaps the most developed capital market in the world.  No doubt Brexit will cause some operations to be transferred to the EU, but London will continue as one of the leading capital markets for some time to come.

Nicolas Mackel, Head of Luxembourg for Finance, told the Telegraph - “The EU doesn’t as a general rule understand the needs, or even the benefits, of financial markets, and with the British voice at the European Table removed, it would be even less likely to accommodate them.”

Conclusion

Brexit has brought much uncertainty to both sides of the Channel.  A ‘Hard’ Brexit will result in a loss of access to the EU Parent/Subsidiary Directive and the Interest and Royalties Directive for the UK.  A ‘Soft’ Brexit, on the other hand, may mean this position is relatively unchanged.  A combination of the ‘fall-back’ position in claiming treaty relief under UK double tax agreements and the domestic law of EU countries, means that the effect of a ‘Hard’ Brexit, in this respect, is marginal.

A ‘Hard’ Brexit on the other hand may result in the UK introducing further legislation to become an even more competitive jurisdiction than it is today.

Additional Information

If you require additional information regarding this subject please contact Laurence Binge – advice.uk@dixcart.com

Categories: United Kingdom, 2017