UK and International Tax news

Tax Treatment Of EU Dividends Interest And Royalties To Change From 1 January 2021

Wednesday 30th December 2020

From 1 January 2021 certain EU Directives providing for relief from withholding taxes on payments of dividends, interest and royalties by EU companies will no longer be available to associated UK companies.

After 31 December 2020, the UK will cease to be treated as a EU member state for the purposes of the Parent-Subsidiary Directive [PSD], the Interest and Royalty Directive [IRD], and the Merger Directive.

The PSD provides for an exemption from withholding tax at source on dividends distributed between EU companies and an exemption from tax at the parent/recipient company level if the shareholding is at least 10% which has been held for a minimum of 24 months. The IRD provides for a similar withholding tax exemption on interest and royalties if the shareholding is at least 25%, held for at least two years.

From January 2021, the tax treatment of dividend, interest and royalty payments from the EU to the UK will become dependent on the domestic law of the source country and the relevant tax treaty between that country and the UK.

For example, without the PSD, Germany would apply a 25% withholding tax on dividends paid to the UK parent, which may be reduced under the UK – German DTA to between 15% and 5% depending on the shareholding.

From 1 January 2021, cross border mergers involving companies incorporated in the UK will no longer be possible although there should be no retrospective taxation of past transactions.

Given the above, it is expected that the UK may renegotiate some existing double taxation treaties so that they replicate the current position. Alternatively, some EU countries may amend their domestic tax rules to achieve the same outcome. In the meantime, many companies will need to take action to manage their cashflow position.  To take advantage of treaty rates of withholding tax including exemption, new or amended withholding tax applications may be needed and submitted to the taxing authority of the paying company.

Given the changes, companies and groups may wish to consider taking action and, if they still have time, bring forward payments while the directives are still in force. They may also want to considering restructuring or migrating operations where circumstances allow and where withholding taxes arising from January 2021 are unacceptably high.

If you would like to discuss the above in more detail, please contact Keith Rushen on 0207 486 2378.


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