Withholding Taxes Post Brexit
From 1 January 2021, multi-national groups will need to consider whether withholding taxes need to be deducted from interest, dividends and royalties, where payments are made across EU borders.
For example, an EU-based company paying interest to a UK group company will now be required to deduct tax at the rate applying in its own jurisdiction. This will vary from country to country, but will typically be around 25%, which is some 6% more than the UK rate of corporation tax. This will represent an additional tax cost, as the additional 6% may not be offset against UK tax.
Withholding tax may be reduced under the relevant Double Tax Treaty. In many cases the required deduction may be reduced to nil, and invariably to less than 19%. But double tax relief is not automatic: the paying company must apply for clearance from its tax authority overseas to claim treaty relief.
Likewise, dividends received are often subject to withholding tax. Since dividends are normally tax-free in the hands of the receiving company in the UK, any deduction of tax at source represents a real tax cost. Again, this can be mitigated by obtaining permission to pay dividends at a reduced rate of tax, but very often there will still be a deduction of some amount.
For outward payments, there is no change from the current position. Companies are required to deduct 20% tax from interest payments to group companies based in the EU unless the paying company applies to HMRC for permission to pay gross. Again, permission is not automatic; it must be applied for. Where tax is required to be deducted, it must be paid over to HMRC and form CT61 must be completed; HMRC may issue assessments for the tax where it has not been accounted for.
In the case of dividends, there is no UK withholding tax, and dividends may continue to be paid without deduction of tax.
Companies making cross border payments of interest, royalties and dividends should therefore check that the optimal withholding tax position will be obtained in advance of such payments being made. More fundamentally, a review of the group’s financing structure may be warranted.
If you need further advice on the issues raised here please get in touch with our tax team.