Brexit: Potential consequences on UK/Italy tax relations
On June 24 the British people voted in favour of the UK leaving the EU. The vote itself does not automatically imply the withdrawal from the EU: It will only take place once Article 50 of the EU Treaty has been invoked and the UK is required to notify the European Council of this. The UK will then have to negotiate with the EU the terms and conditions of its withdrawal. For the time being, the terms of the UK’s withdrawal from the EU cannot be foreseen and therefore the consequences are still uncertain. Here we highlight some of the main tax consequences, regarding the relationship between the UK and Italy, which might be derived from the UK leaving the EU, however these are subject to UK-EU negotiations. It is possible that the UK may remain in the European Economic Area, in which case some of the rules below would continue to apply.
Impact on EU primary legislation for corporations
The UK’s withdrawal from the EU will mean that the fundamental freedoms laid down in the EU Treaty will no longer apply in relation to cross-border economic activities between the UK and Italy, with the exception of the free movement of capital which applies vis-à-vis third (i.e. non-EU Member) States. For example, this would mean that UK companies setting up subsidiaries or branches in Italy will no longer be protected from discriminations in Italy pursuant to the EU’s freedom of establishment. Double tax treaty non-discrimination rules will still apply and the UK and EU may negotiate to retain the fundamental freedoms.
Impact on EU secondary legislation
With the UK’s withdrawal, EU Directives and Regulations governing the relations between EU Member States and the UK will no longer apply. With particular reference to tax law:
- The Parent Subsidiary Directive, which provides for an exemption for inbound and outbound dividends paid between qualifying EU companies of different EU Member States, will cease to apply in the relations between EU Member States and the UK. Furthermore, the Interest and Royalty Directive, which provides an exemption from withholding tax on outbound interest and royalty payments between qualifying associated companies of different EU Member States, will cease to apply in the relations between EU Member States and the UK. Needless to say, the UK, similar to Switzerland, may negotiate with the EU to apply a regime, for UK-EU cross-border dividends, interest and royalties, substantially similar to the regime under the aforementioned Directives. If no such regime is negotiated, the structure of corporate groups will need to be reviewed in order to minimize the adverse consequences deriving from the different legal framework;
- The Merger Directive, which grants under certain conditions, a tax-free (neutral) regime to restructuring transactions between qualifying companies of different EU Member States, will cease to apply in the relations between EU Member States and the UK;
- The Directives on exchange of information and assistance in the recovery of tax claims will cease to apply in the relations between EU Member States and the UK;
- Further and foremost, in terms of indirect taxes, not being bound by the VAT system, supplies of goods from the UK to the EU and vice versa will not qualify as intra-Community supplies but, rather, as importations (subject to VAT) into the EU or exportations from the EU respectively.
- The Anti-Tax-Avoidance Directive, which obliges Member States to introduce five anti-abuse measures against common forms of aggressive tax planning into their domestic legislation, will also no longer apply to the UK.
Impact on EU soft legislation
The UK’s withdrawal from the EU will mean that European ‘soft’ legislation (codes of conduct, recommendations, communications, etc.) will not be addressed to the UK anymore.
Finally, please note that within Italian domestic law, several specific provisions applicable only to taxpayers of EU Member States were introduced. The UK’s withdrawal will trigger that the regimes laid down by the above-mentioned domestic provisions for EU Member States will not apply in relation to the UK. The analysis of such specific provisions is outside the scope of this note.
This article describes only some of the potential consequences of the UK withdrawal. The effective consequences will need to be assessed when the outcome of the negotiations are available. Such negotiations will have to be monitored in order to minimize the adverse consequences from the changes in the legal framework as well as maximize potential opportunities.
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