Brexit and withholding tax: Navigating payments to UK companies
When the Brexit transition culminated on 1 January 2021, it wasn’t just a political or geographical shift. It implied a transformative change for UK businesses, especially concerning financial transactions with their EU counterparts. A significant area impacted was withholding tax on payments, with new rules and guidelines coming into play.
In the pre-Brexit era, payments from EU companies to their UK counterparts enjoyed a certain ease, shielded by the EU Interest and Royalties Directive. This vital directive allowed payments of royalties and interest within the EU to be made without the burden of withholding tax. Similarly, the EU Parent-Subsidiary Directive enabled a smooth transfer of dividends between associated EU companies without any withholding tax implications.
However, the winds of change brought by Brexit have reshaped this landscape. UK businesses had to re-evaluate their financial strategies and understand the implications of withholding taxes in their dealings with EU entities. The once-relied-upon automatic exemptions faded, and today, UK companies potentially grapple with additional or newfound withholding taxes on payments received from EU firms.
Withholding tax UK: Rules for UK businesses after Brexit
The rules for withholding tax in the UK have changed after Brexit. The new rules are generally more complex than the old rules, so it is important to carefully consider the specific circumstances of your business before making any payments to non-UK residents. Below is a breakdown of the key rules/changes.
Dividends
- No withholding tax on dividends paid to UK resident shareholders.
- For non-resident shareholders, a 20% withholding tax is generally required on dividends, which should be paid to HMRC.
Interest
- No withholding tax on dividends paid to UK resident creditors.
- For non-resident creditors, a 20% withholding tax is generally required on interest, to be paid to HMRC.
Royalties
- No withholding tax on dividends paid to UK resident licensors.
- For non-resident licensors, a 20% withholding tax is generally required on royalties, to be paid to HMRC.
Double Taxation Agreements (DTAs)
- There are some exceptions to these rules, such as if the non-resident shareholder, creditor or licensor is a company that is resident in a country with which the UK has a double taxation agreement (DTA). DTAs are bilateral agreements designed to prevent double taxation of income in two countries.
It is important to note that these are just general rules, and the specific circumstances of each case could lead to variations or exceptions. Additionally, tax laws and regulations are subject to change, so it’s crucial for UK businesses to stay updated with the latest information and consult with tax professionals or legal experts to ensure compliance and accurate application of the rules. There may be other rules that apply depending on the specific circumstances.
Impact of Brexit on withholding taxes for UK companies
Brexit implications for UK companies, especially in the context of withholding tax, are multifaceted. Prior to Brexit, many UK businesses had the luxury of automatic exemptions from certain taxes. However, the post-Brexit landscape has seen these exemptions dissipate.
For UK businesses, this means adopting a proactive approach towards understanding the new tax environment. It necessitates due diligence in ensuring that all transactions, especially those with EU entities, are compliant with the current tax norms. It also means that businesses need to be vigilant, keeping abreast of any changes or updates in tax regulations to ensure they are not inadvertently breaching any rules.
Businesses must remain vigilant, ensuring they are compliant with the current norms while also positioning themselves to leverage any available tax reliefs.
Interest, royalties, pensions and purchased annuities
Businesses that make payments of interest, royalties, pensions, or purchased annuities to non-UK residents need to be aware of the new withholding tax rules that apply after Brexit. These payments were previously exempt from withholding tax within the EU, but they are now subject to tax in some cases.
The specific tax implications will depend on the specific circumstances of the payment, such as the type of payment, the residency of the payer and payee, and the existence of a double taxation agreement between the UK and the payee’s country of residence.
Companies should carefully consider the new withholding tax rules before making any payments to non-UK residents. They should also seek professional advice if they are unsure about the application of the rules to their specific circumstances.
For instance, a UK resident previously receiving pension from an EU country may now find themselves in a different tax bracket or with new obligations. However, there are countries that have implemented rules and double tax agreements to address this; for example, the UK-Germany Tax Treaty offers beneficial provisions for UK residents receiving German pension income, especially those who contributed to a German pension for over 15 years. Non-UK pensions might face taxation in both the source country and the UK, requiring potential double tax relief claims. The UK-Germany Tax Treaty overrides this, stating that German pension income is taxable only in Germany for UK residents if certain conditions are met.
Payments that qualify for
withholding tax
Every payment now needs scrutiny. What was previously exempted might now fall under the purview of withholding tax. UK businesses, both large and small, must revisit their transaction ledgers, ensuring they fully understand the tax implications of each line item. This process, although cumbersome, is crucial to ensure compliance and financial health in the new post-Brexit era.
Double Tax Treaty claims
To alleviate the potential financial burdens, UK companies can turn to the double tax treaties established between the UK and various jurisdictions. These treaties, designed to prevent the same income from being taxed twice, can potentially offer full or partial exemption from withholding tax. To leverage these benefits, companies need to adhere strictly to the stipulated procedures.
However, navigating them requires expertise. Often, this means presenting a Certificate of Residence to the overseas tax authority and ensuring completion and submission of a treaty clearance application. It’s crucial to understand these nuances to avoid unintentional tax obligations.
To benefit from a reduced withholding tax rate as outlined in a treaty, businesses must:
- Furnish a Certificate of Residence to the overseas tax authority and/or the payer.
- Diligently complete and file a treaty clearance application.
- Satisfy other stipulated prerequisites.
How can Moore Kingston Smith elevate your business?
Treaty relief claim advice
Our seasoned professionals demystify the intricate processes of claiming under the UK’s double tax treaties. We not only provide advice but also undertake the procedural tasks. We offer expert guidance on claims under the UK’s extensive treaty network. Should an overseas authority request a Certificate of Residence, our team can manage the preparation and submission process to HMRC.
Leveraging our deep expertise, we aim to streamline the process, ensuring HMRC can process your application swiftly and without unnecessary delays or requests for additional information.
Reclaims of excess withholding tax
In collaboration with our Moore Global colleagues, we provide support in reclaiming any excess withholding taxes that exceed the prescribed treaty rate.
Restructuring guidance
Drawing upon years of expertise, our team also specialises in advising on the restructuring of intra-group payments and/or financing. This is done with a keen eye on optimising potential tax costs. If projected tax costs appear significant, we’ll guide you through optimal structures, maximising available claims and exemptions, ensuring every claim possibility is considered.
As a member of the Moore Global Network, we collaborate with experts throughout the EU and globally. Our commitment is to stay abreast of the latest tax developments, ensuring that we deliver timely and precise advice, tailored to your specific business needs.
Your next steps in the post-Brexit tax landscape
Brexit’s influence on the tax landscape is profound, necessitating UK businesses to pivot and adapt. With Moore Kingston Smith as your partner, navigate the complexities of post-Brexit withholding tax and double tax treaties with confidence.
Navigate the complexities of withholding tax with expert guidance. Reach out to Moore Kingston Smith today for personalised assistance to ensure your business remains compliant, resilient, and poised for growth in this dynamic environment.