Prepare for withholding taxes on payments to and from EU territories from 1 January 2021
23 December: When the Brexit transition period comes to an end on 31 December, so will the application to the UK of the EU parent-subsidiary and interest and royalties directives. This means that certain payments to and from UK companies will become subject to withholding taxes.
The EU parent-subsidiary directive removes withholding taxes on any payments of dividends or profit distributions between associated companies within different EU member states. Companies are defined as associated where one holds 10% of the capital of the other for a minimum period of two years.
Similarly, the EU interest and royalties directive removes withholding taxes from payments of interest and royalties between associated companies. The definition of “associated” is different in this case one of the companies must directly hold:
- 25% or more of the capital in the other; or
- 25% or more of the voting rights in the other.
Or a third company also resident in the UK or EU must hold directly:
- 25% or more of the capital in each of them; or
- 25% or more of the voting rights in each of them.
The directives have continued to apply to the UK during the Brexit transition period but this will come to an end on 31 December. The impact is that some payments between UK and EU resident associated companies will be subject to withholding taxes.
The table below shows the rates applicable to certain payments, based on the domestic legislation of the territories concerned and the relevant double tax agreements with the UK at the time of writing (see a full list of agreements on gov.uk). Always check the current treaty in case of any subsequent changes.
| Payments to UK | Payments from UK | ||||
| Country | Dividends | Interest | Royalties | Interest | Royalties |
|
Bulgaria |
5% | ||||
| Croatia | 5% | 5% | 5% | 0% or 5%** | 5% |
| Czech Republic | 5% | 10%*** | 10%*** | ||
| Denmark | 15%***** | ||||
| Estonia | 5% or 10%** | 10%* | 5% or 10%** | ||
| Germany | 5% | ||||
| Greece | 5% | ||||
| Ireland | 5% | ||||
| Italy | 5% | 10% | 8% | 10% | 8% |
| Latvia | 10% | 5% or 10%** | |||
| Lithuania | 10% | 5% or 10%** | |||
| Luxembourg | 5%**** | 5% | 5% | ||
| Malta | 10% | 10% | |||
| Poland | 5% | 5% | 5% | 5% | |
| Portugal | 10% | 10% | 5% | 10% | 5% |
| Romania | 5% | 10% | 15% | 10% | 10% or 15%* |
| Slovak Republic | 10%*** | 0% or 10%* | |||
| Slovenia | 5% | 5% | |||
Notes:
* Lower rate applies to copyright royalties.
** Lower rate applies to interest on sales of or royalties for the use of industrial, commercial or scientific equipment.
*** Witholding tax only applies to patents, trademarks, designs or models, plans, secret formulae or processes, or for the use of, or the right to use, any industrial, commercial or scientific equipment, or for information concerning industrial, commercial, technical, technological or scientific experience.
**** 0% where the conditions of the Luxembourg participation exemption are met.
***** No withholding tax where the company receiving the dividend holds directly at least 25% of the issued share capital of the company paying the dividends.
It is possible that the UK will be able to 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.
If they wish to take advantage of treaty rates of withholding tax (which in some cases exempt the relevant payment from withholding tax altogether), some UK companies will need to make new or amended withholding tax applications. The relevant forms usually need to be submitted by the UK companies concerned to the taxing authority of the paying company to enable the payer to make payments of dividends, interest, or royalties at the applicable treaty rate. The forms are usually completed and stamped by the EU tax authority concerned to provide evidence that the company is entitled to the treaty benefits concerned.
In the case of dividends paid to the UK, some EU member states (eg, Portugal) only allow the treaty rate to apply where the dividends are subject to tax in the UK. A decision will therefore need to be made in those cases whether to elect to tax the dividend in the UK to secure the treaty rate of withholding tax.
EU resident companies may also wish to take similar action in relation to payments from UK resident associated companies. However, it is worth noting that:
- the UK does not withhold tax on dividends made by UK companies; and
- royalty payments can be made gross or at the treaty rate of withholding as applicable by UK companies where the payer reasonably believes that the receipt is entitled to the benefits under the relevant treaty.
Companies and groups may also wish to consider taking alternative action in response to the removal of the directives. If they still have time, they may wish to bring payments forward so that they can be made by 31 December while the directives are still in force.
In other cases, they may wish to restructure and migrate operations where other circumstances allow and the withholding taxes arising are an unacceptable cost of doing business in the territories concerned.