The implications of Brexit and tax aspects of mergers and acquisitions
The implications of Brexit and tax aspects of M&A
On 1 February 2020, after months of discussions, the UK left the European Union. This means that the transition period and the terms of trade between the European Union and the UK will remain unchanged until the end of 2020. In particular, European directives will continue to apply to the UK until then.
Now that the UK is a third country in relations with the European Union, all EU directives will cease to apply to the UK as of 1 January 2021. The terms of trade when the transition period ends will depend on the terms of the future free trade agreement, but its provisions are yet unknown. Negotiations of the agreement should begin in February 2020. From the tax perspective, particularly in the case of transactions, the critical point will be whether or not the UK will be a member of the European Economic Area (EEA), which does not seem very likely at the moment.
As regards income tax, if the UK is not a member of the EEA, the provisions implementing EU directives under which dividend payments, royalty payments and interest payments are now exempt from withholding tax will cease to apply on 1 January 2021.
Such payments when received in an EU member state (e.g. Poland) by a company established in another EU member state (e.g. the UK) may be liable to income tax in the source member state in accordance with the local tax regulations. However, if certain conditions set out in the relevant directives are met, it may be possible to avoid paying withholding tax on revenue.
In addition, it is possible to reduce or avoid paying withholding tax under a tax treaty.
As a result of leaving the EU, the UK has lost its EU member state status as well as the right to apply the provisions of EU directives as the basis for reducing withholding tax burdens within the EU. If the UK is not an EEA member, there will be no basis for Polish companies making dividend, interest or royalty payments to UK-based companies to apply such provisions to enjoy withholding tax exemptions. Polish taxable persons will only be able to apply the reduced rates now available in the tax treaty between Poland and the UK, if the relevant requirements are met, including the requirement of due diligence and the possession of the required tax residence certificate.
As regards dividend payments, things should remain unchanged. The tax treaty provides for an exemption from withholding tax if the beneficiary has held at least 10% of the company's shares for two years. In all other cases, a 10% rate of withholding tax will apply.
For interest and royalty payments, the tax treaty provides for a 5% tax rate (or 0% in exceptional situations, such as in the case of interest on bank loans). This will adversely affect the cash flows that benefit from the exemption under the tax treaty now.
Given the possible negative changes to withholding tax rules, this is the last moment to look at the present structures of international groups of companies. What is particularly important within this context is to verify such structures in terms of intragroup financing as well as the location of strategic intangible assets. As regards withholding tax on dividend payments, no revolutionary changes should be expected, as the provisions of the tax treaty between Poland and the UK are advantageous. However, the applicable requirements must be met, otherwise the exemption from corporation tax at 19% on dividend payments received by the Polish company cannot be claimed.
Restructuring transactions involving UK companies
Brexit is likely to have a negative impact on the tax treatment of certain restructuring activities involving UK-registered companies in Poland. An important point in the case of such activities is whether the UK will be an EEA member, which is not very likely, as was mentioned above.
Certain restructuring activities are tax neutral in the EU when they are completed, and the payment of any tax is deferred until the capital gains on the assets transferred are realised. This is regulated in the EU directive on the common system of taxation applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares concerning companies of different Member States and to the transfer of the registered office of an SE or SCE between Member States.
When the transition period ends, none of the restructuring transactions specified in the Corporation Tax Act (i.e. merger, division, in-kind contribution of a business) whereby a UK-registered company acquires the assets of a Polish taxable person liable to pay corporation tax or transfers its own assets to a Polish company (to the extent permitted by law), will be able to enjoy the benefits of tax neutrality under the Polish Corporation Tax Act (even if any other statutory requirements are satisfied). In such a case, the Polish taxable person will be eligible to apply the provisions of Poland's tax treaty with the UK to the extent that treaty protection is available.
Honorata Green, Partner, Head of Tax M&A Team at KPMG in Poland
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