BREXIT from the Viewpoint of German Companies – The United Kingdom’s Withdrawal from the EU and its Economic and Tax Consequences

Future timetable for Brexit

On 29 March 2017, the United Kingdom (UK) became the first member state to unilaterally declare its intention to withdraw from the European Union. The outcome of the withdrawal negotiations, which will clarify the UK’s future relations with Europe, is expected to become known in October 2018. Nevertheless, a post-Brexit transitional phase has been agreed upon, through the end of 2020, during which the EU treaties will remain in effect. Undoubtedly, significant economic and tax consequences are to be expected for German companies doing business with the UK, especially if the UK withdraws from both the EU and the EEA without making provisions to this effect in the withdrawal agreement. It is therefore necessary to make arrangements for the impact of Brexit as soon as possible, especially for German companies with close business ties to the UK. This article outlines the possible economic and tax consequences of Brexit.

Marcel Jordan, M.Sc., MOORE STEPHENS Koblenz GmbH

Consequences for trade

If the UK withdraws from the EU and the EEA without an extensive free trade agreement, the consequences for trade would be substantial. Customs would raise the price of imported goods on both sides, hurting exports, which would cause considerable damage to both the UK and the German economy. German companies’ international supply chains in particular could suffer from the threat of restrictions on the flow of goods. Moreover, the UK is the third-largest consumer of German exports after the US and France.

Impact on customs and preferential arrangements

There will also be an impact on customs and preferential arrangements in connection with imports to and from the UK. The goods in question will be subject to customs inspections and declaration formalities after Brexit.

 Notification duty for certain products

German companies will also be required to report imports of UK merchandise in the future. This particularly applies for certain medical and cosmetic products imported into the EU from the UK (as a third country).

 CE marking

Certain products require a separate CE marking for marketing within the EU, which may only be issued by notified bodies in the EU. These bodies are responsible for checking products in certain segments, such as medical equipment, to verify conformity with applicable EU rules. Such notified bodies in the UK will lose their EU status after Brexit. Accordingly, German companies should ensure that their CE certifications are valid.

Dividend taxation

Transactions relating to the UK will no longer fall within the scope of application of EU law in the future. In particular, EU Directives relating to taxes will cease to apply. With the Parent-Subsidiary Directive no longer in effect, dividends and profit distributions to British parent companies will no longer be fully exempt from German capital yield tax. A five-percent withholding tax rate will apply in the future in accordance with the Double Taxation Agreement between Germany and the UK. In terms of trade tax as well, the taxation rules for investment income of German parent companies will become much stricter.

Interest and royalty taxation

The Interest and Royalty Directive will also cease to apply, so that interest and royalty payments will no longer be necessarily tax-exempt after Brexit.

Cross-border transformations

Moreover, cross-border transformations involving British companies will no longer protected by the Merger Directive. After Brexit, there will be substantial restrictions on the treatment of future restructuring transactions involving UK companies as tax-neutral transactions. There is also a risk that income will be realized retroactively for assets which were contributed in the past.

Separation tax

When an asset is transferred abroad, tax accrues on hidden reserves. If the asset was transferred to an EU state, a compensatory tax item was formed which was to be reversed over five years. Brexit will require immediate reversal of this compensatory item, which will have the effect of increasing taxable income.

 Exit taxation

Relocation from the EU to the UK will also involve tax risks after Brexit. After all, a corporation whose registered office is transferred to a third country is considered by law to be dissolved, so that the company is subject to liquidation tax. Shareholders with an ownership percentage of at least one percent are subject to the same risk if they change their place of residence to the UK. While this tax accrued even before, shareholders previously had the ability to defer payment interest-free when moving to an EU/EEA state. This option will no longer exist after Brexit. Moreover, it is to be expected that tax deferrals which have been granted in the past will be revoked.

Value-added tax

The VAT System Directive will no longer be applicable for the UK after Brexit, so that British VAT law will no longer be bound by EU rules. The movement of goods and services between German and British companies will be subject to stricter documentation requirements in the future. In particular, British companies will have to register in Germany and German companies in the UK for VAT purposes. Moreover, companies based in the UK will no longer be able to use their European VAT ID in the future, but will instead require documentation from a British authority.

Outlook through the end of 2020

It remains to be seen which provisions the future withdrawal agreement will contain. But certainly, companies with extensive business and/or corporate ties to the UK will be affected to a considerable degree. Both German and British companies should analyze the relevant impact as soon as possible and take the appropriate precautions by 31 December 2020 at the latest in order to be prepared for the UK’s withdrawal from the EU.

Back

Landmark decision: ECJ overturns unequal treatment of third country dividends for trade tax purposes

The violation of Union law through the unequal treatment of third country dividends for trade tax purposes has long been debated in the literature.


Read more

The New Auditor’s Opinion: A Waste of Time?

The Institute of Public Auditors in Germany (IDW) has spent much time introducing the new auditor’s opinion. Not counting the drafts which were discarded, 5 audit standards were ultimately revised or reissued entirely.


Read more

Country-by-Country-Reporting

Multinational enterprises will now document their transfer pricing in three parts: the master file for the corporate group and the company-specific local files will be supplemented by largely standardized country reports (“country-by-country reporting,” or “CbC” reporting for short).


Read more