In 23 June 2016 the UK people voted in favor of leaving the European Union (“EU”), the so-called Brexit. From a legal perspective, the next step would be for the British government to send a Notification to the European Council to leave the EU. After the notification has been filed a transitional period commences in which negotiation on the Brexit takes place. This negotiation period may in principle take 2 years before the UK actually leaves the EU. The outcome of the negotiation will potentially have a significant impact on the UK tax system and for companies doing business in and with the UK. In this blog we will highlight some of the potential Brexit tax consequences for digital economy companies.
The UK may be treated as a third country for EU VAT purposes. This results in increased compliance for cross border trading, because UK companies may for example have no longer access to:
Furthermore, companies doing business from the UK may have to register in all 27 EU Member States in which VAT should be paid. All countries having different VAT rates, invoice rules and time of supply rules. Also, digital companies may be confronted with different interpretations of EU VAT concepts, such as fixed establishments, which potentially creates mismatches between EU Member States in the VAT treatment of business models. Such mismatches could trigger VAT assessments increased with penalties and interest and should therefore be carefully considered when operating throughout the EU.
Corporate tax and withholding taxes
EU directives might not be applicable anymore resulting in taxation of dividend payments and taxation of interest and royalty payments. Within the EU these payments are in principle exempt from any withholding tax. Furthermore, cross-border merges and acquisitions may no longer be tax exempt. Such would make the UK a less favorable location to establish a European hub for digital companies.
A Brexit may result in a large restriction on the free movement of people, one of the four fundamental EU freedoms, between the EU and the UK. This would impact UK digital economy companies in attracting talent from across Europe. UK businesses employing EU workers may need to take action to ensure they will still have a right to work in the UK. On the other hand it may become more burdensome and difficult to attract employees from Europa. Furthermore, EU/EEA reciprocal social security arrangements may no longer be available which impacts the social security contributions payable by and in respect of individuals.
As the present circumstances constitute an unprecedented situation, it is clear that the full extent of the changes resulting from a Brexit will not be known (or effective) for some time. However, it may very well be the case that the Brexit will have important medium to long-term consequences for the UK tax system, especially as British tax rules will over time increasingly diverge from the EU rules. Although this might be mitigated by the expected political pressure to mirror EU changes to which the UK would be subject, Brexit is expected to lead to more complexities and administrative burden for digital economy companies active both in the UK and in the EU. As such the Netherlands seems to remain an attractive location for a European Hub for digital economy companies.