Much of Ireland’s direct tax landscape will remain unaffected when the United Kingdom leaves the EU customs union and single market at the end of the transition period on 31 December 2020. Unlike indirect taxes, direct taxes are not dealt with by the EU treaties, but rather national legislation which must be enacted in accordance with EU treaties. As a result, direct taxes are less likely to be impacted by Brexit.
Numerous areas of Irish domestic tax legislation are dependent on EU or European Economic Area (EEA) membership. If, as expected, the UK leaves both the EU and the EEA at the end of this year, and treaty relief is not available, domestic legislation is likely to be relied upon. The main legislative areas for consideration are discussed below.
EU parent–subsidiary directive (Directive 90/435/EEC)
Many EU directives aimed at encouraging intra-EU trade and investment apply only to ‘Member States’. One such directive is the EU Parent–Subsidiary Directive. The aim of this legislation is to eliminate withholding taxes on dividends (“DWT”) paid to parent companies in EU Member States. Without being able to rely on this legislation, a company paying a dividend is open to a potential withholding tax liability. This will be suffered at the lower of the domestic rate or the rate provided for under the Double Tax Agreement (DTA) between the two relevant States. As there is a requirement for EU membership, UK companies will no longer be able to benefit from this Directive post-Brexit. However, relief is provided for under the Ireland – UK DTA, such that a DWT rate of 0% should apply to dividends paid by Irish companies to UK companies post Brexit.
EU interest and royalties directive (Directive 2003/48/EC)
Much like the EU Parent–Subsidiary Directive, the aim of the EU Interest and Royalties Directive is, where certain conditions are met, that no withholding tax should apply where a company makes certain interest or royalty payments to other associated EU companies. Where a company cannot rely on this EU Directive, withholding tax will apply at the lower of the domestic rate or the rate provided for in the DTA. Similar to the above, the Ireland–UK DTA allows for a withholding tax rate of 0% post-Brexit.
EU mergers directive (Directive 90/434/EC)
This directive seeks to remove barriers to mergers, divisions and transfer of assets by deferring Capital Gains Tax which would otherwise result from the transaction between companies in different EU countries. Without this, intra-European reorganisations can result in large tax liabilities.
Group relief for losses
Group relief for tax losses suffered by a company in one EU or DTA country are available for surrender to a company in another EU or DTA country, where a qualifying group exists. Under current legislation, a qualifying group is one where all relevant companies are resident in EU, EEA or DTA countries. As the UK has a Double Tax Agreement with Ireland, group loss relief will remain unaffected by Brexit. However, in a situation where there is an Irish branch of a UK company, losses will be not be available to be claimed from or surrendered to an Irish resident company by that branch.
Companies Capital Gains Tax (“CGT”) group relief
Under this legislation, assets can be transferred between group companies resident in EU or EEA countries without giving rise to a CGT liability. For a group to qualify for this, all entities must be resident in the EU or an EEA State with which Ireland has a DTA. Therefore, if the UK leaves the EU, without obtaining EEA status, UK companies will not be included in qualifying CGT groups, and any inter group transfers with the UK company will result in a charge to CGT. A UK company exiting a group due to Brexit may also trigger a clawback of CGT group relief previously claimed.
Exit charge migration from Ireland
Where a company ceases to be tax resident in Ireland, it will be deemed to have disposed of and immediately reacquired all of its assets at market value. The resulting exit charge is subject to tax at a rate of 12.5%. When a company migrates to an EU or EEA country, this CGT charge can be deferred and paid to Revenue over a period of 6 years. If the UK does not obtain EEA status on leaving the EU at the end of the year, there will be implications for Irish companies planning to migrate to the UK, as this deferral will no longer be available.
While the UK completing its transition period and leaving the EU and the EU customs and single market on 31 December 2020 will have little impact on the direct tax landscape, there are elements that will need to be considered from a tax planning perspective for any Irish company dealing with a UK company. In the coming weeks, we will get a better idea of the relationship that will exist between the UK and EU going forward and the implications for Irish companies. As the form of this new relationship evolves over the next number of weeks, companies should review their reliance on any of the EU Directives and the likely impact if the Directives no longer apply.
If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of the Mazars corporate tax team below.