There is still currently a great deal of uncertainty as to what happens next between the EU and the UK.
Will the UK remain a member of the EEA or not? Will there be a bilateral agreement with the EU? What if the UK can no longer apply the European directives? Will these directives be retained, or will the UK amend its national legislation?
In the overview below, we start from the premise that the UK will no longer be part of the EEA and that there will be no bilateral agreement with the EU. The so-called no-deal scenario.
In view of the European agreements of 13 December 2018, a Brexit Law has since been published, on 10 April. This Brexit law anticipates a transitional arrangement which will only enter into force if no agreement is reached with the UK. The law specifies that, for the application of income tax, the UK will be treated in the same way as a Member State of the European Union until 31 December 2019. In addition, the transitional tax arrangement will only apply if the UK applies reciprocity.
Under the Parent-Subsidiary Directive (PSD), double taxation of dividend payments is avoided via, on the one hand, an exemption from withholding tax on dividends paid and, on the other hand, an exemption from tax on dividends received at the parent company.
As regards the exemption from withholding tax:
When a dividend is paid out from the Belgian subsidiary to the parent company, this payment may be exempted from withholding tax provided that the cumulative conditions of the PSD are met. These were implemented in Belgian tax law as follows:
- The parent company has a minimum shareholding of 10%.
- The shares must be held in full ownership for a continuous period of at least one year.
- The dividends must come from EU companies subject to normal taxation.
As previously mentioned, the UK will no longer be able to apply the European directives once Brexit has been implemented. In transposing the PSD into its national law, Belgium extended the application of the PSD to countries with which it has concluded a double taxation convention (DTC), in which a clause is included for the exchange of information between tax authorities. Such a clause was included in the DTC between the UK and Belgium. In concrete terms, this means that dividend payments from Belgium to the UK may still be free from any withholding tax even after Brexit (assuming that the other required conditions have been met).
The exemption from tax on a received dividend was implemented in Belgian tax law via the dividend received deduction. Dividends can be 100% exempt for the Belgian parent company if the following cumulative conditions are met:
- The parent company has a minimum shareholding of 10% or an acquisition value of at least €2,500,000.
- The shares must be held in full ownership for a continuous period of at least one year.
- The dividends must companies from companies subject to normal taxation.
As such, no condition is imposed that the payment must come from a company established in the EEA/EU. In other words, if a UK subsidiary pays out a dividend to a BE parent company, the BE parent company can apply the dividend received reduction on the received dividend. It is, however, crucial to consider the following 2 elements.
- In Art 205 §2 ITC92, it is stated that when dividends are received from non-EEA countries, the dividend received deduction can still be applied, but not to a number of listed rejected expenses such as restaurant costs, reception costs, etc. The dividend received deduction that cannot be applied can however be carried forward to subsequent taxable periods. When the UK is no longer part of the EEA, this rule will certainly play a role.
- We should also consider the taxation condition. This specifies that a Belgian parent company cannot benefit from a dividend received deduction if the subsidiary is established in a country where the common tax provisions are significantly more favourable than those in Belgium. This means that the common nominal rate or the rate corresponding to the actual tax burden is lower than 15%. The common provisions of companies established in a Member State of the EU are deemed not to be significantly more favourable than those in Belgium. As long as the UK is a member of the EU, a reduction in its rate will not affect the application of the dividend received reduction.
Up until now, the common nominal rate in the UK has been set at 19%. From 1 April 2020 it will be reduced to 17%. Even after Brexit, the dividend received deduction can still be enjoyed on the basis of the current UK national law regime. However, if the UK were to decide to further reduce its nominal rate to below 15%, it would be regarded by BE as a country with significantly more favourable common tax provisions, which would mean that the dividend received reduction could no longer be applied. Please note that in certain double tax conventions, an equal treatment clause has been included by Belgium. As a result, the dividend received reduction can still be applied for the countries concerned (e.g. Belgian DTC with the USA and Switzerland). However, the clause in the DTC between BE and the UK is more limited and it is therefore currently unclear whether dividend received reductions can still be applied if the UK rate falls below 15%.
In addition, as regards capital gains on shares, Belgium has also recently amended its national law so that the conditions for the application of the exemption on capital gains are now in line with those of the dividend received reduction. Here again, the taxation condition will therefore become a relevant assessment point for the exemption of capital gains realised by a Belgian company on shares in a UK company as soon as Brexit has been implemented. However, the above-mentioned Art 205 §2 ITC92 does not apply to any realised capital gains, so that a total exemption can be applied as soon as the relevant conditions have been met.
Interest and Royalties Directive
The Interest and Royalties Directive (IRD) is also a European directive, which has been transposed into Belgian domestic law. On the basis of this directive, interest and royalty payments can be made – under certain conditions – free from withholding tax. Whereas Belgium, regarding dividends, provides for the extension of the PSD to countries with which it has concluded a DTC (and a clause for the exchange of information between tax authorities has been included), it has not done so for the IRD. At the same time, the directive, and therefore Belgian national law, only restricts itself to companies established in a member state of the EU (and therefore not the EEA) as regards the granting of the exemption. If the UK implements Brexit, it will also no longer be possible to apply the exemption provided for by Belgium through the implementation of the IRD. In order to meet this challenge, it is hoped that a bilateral agreement will be concluded between the UK and Europe.
In the absence of such a bilateral agreement, the provisions of the DTC between the UK and Belgium need to be examined:
- Art 11 of the convention specifies that interest paid by a UK company to a Belgian company is taxable in Belgium. However, the UK may also apply a withholding tax of up to 10%, except in the case of interest on a loan concluded between two companies. In the latter case, an exemption therefore applies.
- Art 12 of the convention specifies that royalties paid by a UK company to a Belgian company can only be taxed in Belgium. In concrete terms, this means that even after Brexit, it will still be possible to apply an exemption from withholding tax to royalty payments. Even if there is a withholding tax under UK national law.
However, an important remark in this respect is that the administrative obligations after Brexit will become stricter. Indeed, in order to benefit from the reduction under the convention, the form 276R (for royalties) or 276 Int.Aut. (for interest) needs to be drawn up. This procedure is more time-consuming and complex than obtaining the exemption certificate under the IRD.
The Merger Directive is also a European directive, which has been implemented into Belgian national law. This directive provides that cross-border reorganisations can be carried out in a tax-neutral manner. One condition in order to apply the Merger Directive is that it must be a reorganisation between intra-European companies (= every company of a member state of the EU). After a possible Brexit, it will therefore not be possible to rely on the Merger Directive if a UK company is involved in the merger.
If a company opts for deferred taxation, it needs to reinvest within the specified reinvestment period. This must be done in depreciable tangible or intangible fixed assets which are used in a Member State of the EEA for the exercise of the professional activity. A reinvestment by a Belgian company in an asset located in the UK will therefore no longer qualify.
Tax shelter system:
This system can be used when certain conditions are met, including the need for qualifying expenditure in the EEA.
Belgian group companies and Belgian establishments of EEA group companies with a financial year beginning on or after 1 January 2019 (tax year 2020) may opt for the system of fiscal consolidation if the conditions are met. One important condition is that they must be affiliated companies. This means that there needs to be a direct 90% shareholding between parent companies and subsidiaries, or that sister companies have a direct 90% common parent company established in Belgium or the EEA. In other words, Belgian establishments of UK companies and Belgian sister companies with a 90% UK common parent company can no longer invoke the system of fiscal consolidation.
Deductibility of losses of a permanent establishment:
The amount of professional losses incurred in foreign establishments or in relation to assets located abroad which the company has at its disposal and which are located in a state with which Belgium has concluded a DTC, are no longer automatically deductible from the Belgian profits as from financial years commencing on 01/01/2020. Except if it relates to definitive loss of earnings incurred within an EEA member state. In other words, the losses are only deductible if the Belgian company can demonstrate that these foreign losses have not already been deducted elsewhere. Moreover, this will only be the case if the permanent establishment is located in an EEA member state.
When a taxpayer takes assets or their tax residence outside the tax jurisdiction of a State (= transfer of registered office), exit taxes may apply. These levies can be paid immediately or deferred over a period of 5 years. The deferral possibility only applies in certain cases. Among other things, it must pertain to transfers of registered offices to other EEA member states. For those EEA member states that are not EU member states, an additional condition is that there must be an agreement providing for mutual assistance for recovery. In concrete terms, if there is a transfer of registered office from Belgium to the UK, it will not be possible to make use of deferred taxation, but an immediate tax will always be charged.